Back in 2010-11, when the stock price of Kingfisher was falling rapidly, many investors were wondering if it was a golden opportunity to buy the stock. It was still a classy airline, part of a profitable group and had clear market share. But things had begun to change. Debt was too high, cash was crunched and the company was hurtling towards operating un-viability.

Over the last 5 years, Kingfisher has not been an isolated case. Companies like RCOM, Deccan Chronicle, Unitech, DLF, Suzlon and the Jaypee group have seen substantial value erosion of 80-90%. While other business models may not be unviable like Kingfisher, the problems of debt are huge. That would make any bounce-back very difficult. Never try to catch such falling knives. Wait for confirmation that the worst is over and better still be convinced that there is a genuine story for the stock to bounce back.

Falling knives are also common among the large cap names with highly reputed managements. This typically happens when a major cycle reverses or pricing power is suddenly lost. Larsen & Toubro between 2010 and 2013 was a falling knife due to a slowdown in the capital cycle. HUL was a falling knife between 2003 and 2006, as it lost pricing power to competitors. Don’t jump into large caps and reputed names just because they are falling. Look at the underlying trend. For example, PSBs may look attractive but they may be falling knives in this market.