2 Steps that help in identifying Turnaround Stocks for Big Profits

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In an interesting session as a part of the highly popular MarketShala series, conducted by Elearnmarkets; Mr Vivek Bajaj, Co-founder of Elearnmarkets, and Mr Chetan Panchamia, a prolific intraday trader and trainer with many years of experience, came together to decode how to find the turnaround stocks for big moves.

Here is a short discussion about this session. If you want to get a practical understanding decode how to find the turnaround stocks for big moves, watch the full video at the end of this blog.

Have you ever thought about how huge profits are made in the stock market? Huge profits in the market can be made by placing a big bet in those stocks when there is no talking about it. But, in fact, there are negative talks about it. So, in today’s blog, we will discuss about turnaround stocks or stories. 

What are Turnaround Stocks?

Turnaround stocks are those stocks that keep on falling and suddenly turn up.

These are stocks of companies that have gone through a phase of weak financial performance, such as overleverage or no demand for the products, and share prices have been beaten down. 

The idea is to find companies that are likely to identify issues that lead to weak performance and change their business strategy to become profitable again. So when the delivery starts picking up, we get to know that the stock can start rising again.

What are the Steps to identify Turnaround Stocks?

Below are the steps in which we can find the turnaround stocks:

1. Survival

When we start getting scared that the company will survive or not after 3-5 years, then that’s the biggest fear for the investors. 

For example, Reliance Communications, this company was EBITDA positive, which means that the interest portion became so heavy that it could not run the company. Then the price war came in which the company could not survive. Also, there was a problem with the management.

2. Triggers

Now let us come to three main points:

1. In which market is it catering?
2. How is the Management?
3. What is its product?

When it comes to the question of the company’s survival, we need to check if the company has fallen more than 75% from its 52 weeks high. If it has fallen more than 75% from its 52 weeks high, we need to get scared.

For example, Vodafone Idea Ltd.’s 52-week high is Rs. 123 and its 52-week low is Rs. 2.30, which is around 95% down, which means something is wrong with the company. Then it starts trading in its lower band. So, there was no major change in the three points discussed above.

When this stock is consolidating in the lower range for around 18 months as with Vodafone Idea Ltd. and then the breakout comes due to some catalyst like some positive news in the telecom sector, then we must start looking at this stock again as we get to know that this company will survive.

So, if it is surviving, its growth potential will also start increasing. Thus, when the stock begins surviving again with the triggers then it becomes a turnaround stock and investors can earn big profits from such moves.

Now the question comes as an investor what should you do after the breakout.

Watch our webinar on HOW TO FIND TURNAROUND STOCKS

What should an Investor do after identifying the breakout in the stock?

Two internal points come under this:

1. If you are looking at the business model, no stoploss can be placed.
2. But if you are looking at the chart, stoploss can be placed at the low of the prior month’s low.

The question comes of how much of our capital we should put in that turnaround stock.

If the turnaround stocks become successful after their multi-year breakout, then you should put around 2% of your capital. For example, if you have a capital of Rs. 5 lakhs, you should put around Rs. 10,000 in that stock. If you succeed in this, the Rs. 13 can turn to Rs. 500.

There are also scans in StockEdge that will help us turnaround stocks fundamentally, such as Turnaround YoY as shown below:

So, the name of stocks will come when clicking on the above scan:

One should also note that risk is very high in turnaround stories. There will be more failures than successes but reward even if you get 2 right is superb.

You can watch the entire video from here

Bottomline

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Happy Investing!