It  makes sense to buy stocks that are FII limit up!

While it is common “smart” belief that investors should avoid companies with very high FII holdings I have personally experienced that some very profitable investments can be made by buying companies with very high FII holdings. The other essential attributes of the stock should be:

1)     FII limit hit: There are companies where the FII limit (as regulated by the Govt.) has been hit and no further buying can be made. This indicates that the company is yet to see fair value. When ever a regulation puts a cap of the demand side of a company then the stock tends to be below fair value. Some companies that fall within this space are SBI, HDFC,, Pantaloon Retail, TV 18. Interestingly some of these stocks used to see FII trades at more then 20% to market price.

2)     The liquidity is low: Low liquidity is a double edged sword. While at first sight it would appear frightful to invest in a company with low liquidity and high FII holding the other side of the argument is equally compelling. No FII would like to get stuck in a low liquidity stock. If the results for a quarter are bad then the stock could be slammed down 50%. So these people would be buying that stock only when they have a longer term view or in other words they would be unfazed by Q-on-Q results.

3)     FII limit up in a low market cap stock tells us more about the long term nature of this business then otherwise FII limit up in a small cap stock means that some research has been done unless it is an IFSL (ould know that in hindsight only

4)     Now if some one argues that a stock with FII limit up cannot move then consider this. TV 18 has been a 3 bagger since it went FII limit up and Pantaloon, SBI have moved up three fold after having gone FII limit up.

5)     And finally we have to do our own diligence merely buying a stock because it is FII limit up makes little (no) sense. I prefer to look at these figures as a passing reference to the analytical process not a guiding one.Interestingly Mc Dowell had an FII holding of 0% before it became a 15 bagger