Historically every major bull market run sees a lot of stocks or a particular sector which become multi-multi baggers and become a market fancy. Such a bull run leads to lot of excesses in the system which get totally cleaned of in the following bear phase. The over-optimism , market fancy, lofty valuations etc etc and many other reasons. Even the strongest of the companies may see a shave-off of 80-95 % from peak and may remain at lower levels for quite some time. But the strongest of the lot may come back and achieve similar highs in the next bull run and also give super returns in a span of 2-3 yrs but may remain highly sideways after the wreckage.
Lets have a few examples :
Please note all the prices used are adjusted to bonuses/splits till date and the extent of drop and run is more important.
2000 IT Boom
Infosys corrected from 1726 in 2000 to 269 in 2001 which is a correction of 84 % erosion !.
It recovered to 1700 again by 2006 .
Satyam corrected from 723 to 55 a correction of 92 % . Could only reach to 445 levels by 2006.
Wipro corrected from 1633 to 135 a correction of 88 % . Could only reach to 600 by 2006.
These were the top 3 stocks from the IT sector which could notch back comfortably in the next 5 years.
But the other small ones which caught market fancy and went to highly over-valued levels donot follow the same pattern. Although these companies may still be functioning well now but the bubble levels may never come !
GTL corrected from 2560 to 35 levels which is an erosion of 98 % . The stock could only cross 100 + levels by 2006.
ZEE corrected from 750 to 40 which is an erosion of 95 % . The stock touched 180 by 2006.
HFCL 2550 to 30 came down to almost 1 % of high. The stock is still in 2 digits till now. Pentamedia Group was another which came down to 1 % and r still in 2 digits or lower.
Investors stuck at the top of the rally lost 80-90 % of the money !!! coz of getting in late! and sticking to the mistake. And in some bad ones the total value got eroded.
Smart long term investors bought the biggies in 2001-2003 at the end of bear cycle got almost 5-10 times in next 3-5 years in strong companies with good visibility.
This was 2000-2003 now lets have a look in the excesses of the 2003-2008 bull run. The sector which saw a bubble can be termed to be real estate related stocks.
Lets have a look at the few strong ones.
DLF 1225 to 330 . Erosion of 73% .
Unitech 545 t0 98 . Erosion of 82 %
HDIL 1113 to 150. Erosion of 86 % .
These three are the stocks with high market cap compared to the rest of the gamut like orbit,ansal,parsvanath,omaxe etc etc and many more in the small cap segment. All these stocks have lost almost 80-95 % from the peak levels. I had been critical and made a specific avoid on these stocks in the last few months as one may not know where these stocks could stop although they may be good companies and may continue to function well but history says to avoid.
So what next , Ideally the calcualtions which i have seen over the data in lot of bubble stocks says that the lowest risk is to buy such stocks at 8-15 % from the peak and keep on hold for next 2 years. Although the major consideration is to make a thorough check of fundamentals and prefer to stick to companies with high visibility, earnings projection and may stay well in the business for next 3-5 years.
So in that scenario the low risk bets would be DLF , Unitech and HDIL if available at 85 % or lower and be bought in small lots in the next 3-6 mths closer to 80-90 % from peak if it comes to those levels but the holding period would be a minimum of 2 years. Accordingly one can tae only 25 % of quantity in Unitech at 90-100, HDIL at 150-165 and keep provisions to add further dips in small lots. Although this may be a risky bet now but 2 years down the line could be a different thing. Investors need to do adequate research and will have enough time as these stocks may remain sideways or down in the near term. This is just a stastistical viewpoint.