If you have been reading our mails, you might be aware that we have been extensively focusing on beaten down stocks/sectors wherein the companies have strong balance sheets and will probably emerge stronger from this crisis.
The thesis behind the same is simple:
Since the bear market that started in Jan’18 and accentuated by covid-19 crisis, a lot of stocks have corrected to levels wherein the market is assuming that companies won’t survive. It is true that some may find it difficult to come back, it is also true that with the fall of weaker ones, the markets will consolidate in the hands of few stronger ones and those companies will prove to be great wealth creators.
While a lot of factors will be important, a must have for those that will survive is a strong balance sheet, no matter if it’s a small company or a large one.
Looking at the downfall, it may seem difficult to believe that any money can be made in beaten down stocks/sectors; however, these will be the ones that will probably go on to deliver 5-10x or even more over the next few years.
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Don’t believe us…Well, in 2017-18 we came out with two Pharma stocks for our members:
- Suven Lifesciences/Suven Pharmaceuticals in May 2017
- Aarti Drugs in Sep 2018
You can read the reports HERE
Mind you, Pharma sector had peaked out in 2015 and the stocks were in general down by 50% or even more by 2017-18 and as always, the favourite sector of the investors in 2015 had turned into an untouchable by 2017-18.
Luckily for us, Investing in the above mentioned Pharma stocks in distressed times has proved to be fruitful as Suven is up by around 120% since May’17 (30% CAGR) and Aarti Drugs is up by around 80% since Sep’18 (40% CAGR).
Suven Life got demerged into Suven Life and Suven Pharma in Jan’20 and the combined stock price of the two companies (including exit from Suven Life at around 50) is ~390 against initiation price of 175.
The point we are trying to make here is that if you are patient enough, some of the most profitable investment opportunities emerge from the beaten down sectors.
Here again, it is easy to imagine why the above happens. Most of the times a stock gets beaten because of the depressed earnings and combined with that the multiples like PE, PB, also get de-rated to lower levels.
Based on your research, if you are able to determine that it’s a temporary low phase and the company can bounce back with stronger earnings, as an investor you get the benefit of both higher earnings and valuations re-rating.
The same holds true for present times as well. If one can look beyond next 6-12 months uncertainty, we believe, it’s a great time to be a bottom-up stock picker.
Disclosure: I have personal investment in Suven Pharmaceuticals and hold Aarti Drugs in wife’s account.
Wish you good health and wealth.
Research Analyst Details
Name: Ekansh Mittal Email Id: [email protected] Ph: +91 727 5050062
Analyst ownership of the stock: In Suven Pharmaceuticals
Details of Associates: Not Applicable
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Disclosure (SEBI RA Regulations)
Whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company/companies and the nature of such financial interest – Yes, investment in Suven Pharmaceuticals and Aarti Drugs
Whether the research analyst or research entity or his associates or his relatives have actual/beneficial ownership of 1% or more securities of the subject company (at the end of the month immediately preceding the date of publication of the research report or date of the public appearance) – No
Whether the research analyst or research entity or his associate or his relative has any other material conflict of interest at the time of publication of the research report or at the time of public appearance – No
Whether it or its associates have received any compensation from the subject company in the past twelve months – No
Whether it or its associates have managed or co-managed public offering of securities for the subject company in the past 12 months – No
Whether it or its associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months – No
Whether it or its associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months – No
Whether the subject company is or was a client during twelve months preceding the date of distribution of the research report and the types of services provided – No
Whether the research analyst has served as an officer, director or employee of the subject company – No
Whether the research analyst or research entity has been engaged in market making activity for the subject company – No