Over the last two months, defense stocks have seen a sharp decline of about 28%, while the broader CNX 500 index has fallen by only 11%. This indicates that certain sectors, which were previously performing exceptionally well, are now underperforming significantly. When investing in any sector or stock, it is crucial to assess whether your holdings are merely moving with the market or underperforming it by a large margin. Outperformance is a good sign, but when underperformance starts, it is worth evaluating whether to hold or move towards stronger stocks.
Steep Declines in Previously Strong Stocks
Some defense stocks have experienced severe corrections. Zen Technologies, for example, has dropped 55% in just one month. However, it is important to note that its three-year return still stands at an impressive 450%. Similarly, Cochin Shipyard has returned nearly 687%, Garden Reach 447%, and HAL 400% over the last few years. These stocks were clear winners in previous years, and being invested in them during those periods was highly beneficial. But now, with many of them declining by 20-50% within a short time, the trend that fueled their rise appears to have ended.
Recognizing When to Exit
No one can perfectly time the bottom or the top of a stock’s journey. A stock that moves from ₹100 to ₹1000 is rarely bought at ₹100 or sold at ₹1000. However, even entering at ₹200 and exiting at ₹800 would still result in a fourfold gain. Stocks like Zen Tech, Cochin Shipyard, and others have surged between 600% and 1500%, offering incredible returns. The key is recognizing when the trend shifts. Holding onto a stock that has already declined sharply might result in long periods of stagnation or further decline, while new opportunities may emerge elsewhere.
Momentum Perspective: Moving to Stronger Stocks
From a momentum investing perspective, when stocks begin to fall significantly, it signals that their trend has changed. While some investors may hold onto stocks for fundamental reasons, those following price-based strategies should consider shifting to stocks showing strength rather than remaining in those that are falling.
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Why it matters
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