The Economic Times daily newspaper is available online now.

    Why turnaround investing is not everybody’s cup of tea

    Synopsis

    Turnaround investing is not for the average investor. There are too many factors at play for an average investor to be able to take a call on how elongated the turnaround cycle could be.

    krishna kumar karwa1-1200ETMarkets.com
    For the next two years, the midcaps should offer you better returns than what we have seen in 2018-19, says Krishna Kumar Karwa, MD, Emkay Global.

    Do you believe in the turnaround theme? Tata Motors, Zee and IndusInd Bank have made comebacks. Is there merit in buying fallen angels?
    Investing in these turnaround stories is also a function of what is the market sentiment at that point of time. We have seen that many of the stocks that you mentioned are possibly quoting at 40-50% lower than what they were quoting now three, four months ago. So whenever sentiment is on an uptick and there are some signs of turnaround, the markets become more hopeful on the turnaround in these companies and obviously valuations go up.

    My sense is that this turnaround investing is not there for the average investor. There are too many factors at play at any point of time for an average investor to be able to take a call on how elongated the turnaround cycle could be.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    IIM LucknowIIML Chief Operations Officer ProgrammeVisit
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit
    Indian School of BusinessISB Chief Digital OfficerVisit

    For a sophisticated investor, this could be a good opportunity to invest. You have to look at their track record in terms of how they have created wealth for investors over a longer timeframe and what is the kind of competition that they are facing. So some of these turnaround stories could be opportunities where there is limited competition and for various reasons, temporarily the companies have gone into a challenging environment.

    Turnaround investing is about cash flow. If the companies are in a position to generate free cash flows consistently and if you have decent amount of confidence on that front, then you can think of investing in such companies but where there is a huge amount of debt and the turnaround is predicated on economic environment improving and the company doing well, it would be very challenging because if that does not happen then the debt will take the company down.

    Clearly it seems that equities is really the place to park one's money currently. Gold also has emerged as a preferred story of late. What can be a realistic expectation of returns when it comes to the index?
    Return expectations is a function of cost of money. At the end of the day, what is the risk free rate of return that you are currently getting? If the current risk-free rate of return is around 6-7%, how much will you pay for or how much will you expect for taking that risk? I do not think it is more than an additional 6-7%.

    So any investor looking to invest in the market and if he is able to make 12-14%, 15% kind of returns, should be very happy because that is the way it is. My sense is that while investing, if return expectations are realistic, then automatically you do not commit too many errors in terms of buying into risky sectors or risky stocks etc. Having said that, in the last few months, we are seeing negative flows.

    My view is that after the sharp dip of the earlier months in the markets and now this strong recovery in redemptions, going forward average retail investors should be using managed accounts through either PMSs or MFs to invest in the market. The mandate that they should be giving their managers be realistic. Between large cap and midcaps, there has been a decent recovery in the mid market segment but on a three-year basis. Still the midcaps trail the large caps by a wide margin.

    In an economy which is expected to turn around, for the next two years, the midcaps should offer you better returns than what we have seen in 2018-19. There should be an outperformance of the mid market segment over the large cap indices in the coming few years. So, a balanced portfolio should be the need of the hour as far as investors are concerned.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in