Choosing to invest in stock market during a recession or trying to prepare a recession-resistant portfolio usually requires a rethinking of which stocks to actually own. Amid the Covid-19 inspired stock market meltdown, investing in value stocks proves to be an attractive choice for investors on the hunt for good bargains. Kavan Choksi underlines that while downturns can be painful, they also do have positive side effect. They are the time when stocks of even good companies are sold at a low a level by panicky sellers, making them ‘value’ stocks’.
Kavan Choksi talks about the things to research on when investing in value stocks during recession
During a recession, investors must act cautiously and remain vigilant in monitoring the market landscape for opportunities to identify and leverage high-quality assets at discounted prices. This is where value stocks come in. While the market of recession can undoubtedly be difficult, they also do often coincide with the best opportunities. A value stock is basically a security trading at a lower price than what the performance of the company may otherwise indicate. People investing in value stocks try to capitalize on inefficiencies and turbulence in the market during the recession, as the price of the underlying equity may not match the company’s performance.
A value investing strategy traditionally revolved around finding stocks that are undervalued by the market at large. Value stocks are known to be among the most high-quality investments in a recession portfolio, potentially outperforming growth stocks. When economic growth goes down, growth stocks invariably cannot go up. On the flip side, value stocks are able to capitalize on the down market and explore opportunities at sale prices.
Comprehensive analysis is extremely vital to developing a bear market investment strategy. This means looking under the hood of prospective value stocks and checking how the engine is running. Periods of increased volatility may create opportunities as stock prices end up diverging from company-specific fundamentals. However, this does not mean that investors should deviate from their investment process just because of larger-than-normal market swings. They need to put emphasis on the fundamentals of investing, and evaluate the value stocks on the basis of the underlying strengths and weaknesses of the relevant company. Researching on its cash flow, management team, liabilities, assets, business model, and the demand for its products and services, both in and out of a recession, would be critical.
As per Kavan Choksi, investors must make sure that the companies they are investing in are not just strong enough to weather the recession storm but will also come out stronger on the other side. Even though past performance is not always a guarantee of what the future may hold, it is quite prudent to consider a value stock’s track record. Investors need to research on how specific value stocks have performed during past recessionary periods, in order to get a baseline reference to compare. Apart from the overall performance of the value stocks, the stability of a dividend-paying stock’s distributions must also be taken into account. The dividend history of a company is a good measure of its financial strength.