Everyone is looking for growth stocks at reasonable valuations or turnaround opportunities before turnaround happens.
The idea is to catch such stocks early so that in case there’s good growth in earnings, one can get good returns on stocks.
The question is – How does one screen for such stocks? We believe, by tracking Promoters/Insiders actions.
Before that: We are evaluating a few stocks for “Insider Bets“ subscription and planning to release a new stock recommendation this week for members.
Coming back to Promoters/Insiders actions, we believe one good way to screen for such stocks is as follows:
Look for Preferential allotment of warrants/shares to Promoters in companies in which there’s been a decent correction in stock price (40-50% or more) or going through a down phase and the major allocation is to Promoters.
Let’s look at a case – Archit Organosys
- From FY 17 to FY 20, company’s sales increased from Rs 48 crore to Rs 77 crore; however, the operating profit remained flat at Rs 4 crore. Due to higher interest and depreciation cost, PBT decreased from Rs 3 crore to loss of Rs 1 crore
- Stock price peaked in Apr’17 around 77 odd levels and trended downwards to 9-10 odd levels in 2019-20. In the month of Apr’20, the stock corrected further to 5-6 odd levels
- Post Mar’20, the stock started recovering and was trading around 10-11 odd range in Aug’20
- As the company was going through a lean period in terms of stagnant operating profit for the last 4-5 years, something interesting happened. On 27th Aug’20, the company informed the exchanges that it will hold a board meeting on 1st Sep’20 to consider the proposal for allotment of convertible warrants on preferential basis
- On 1st Sep’20, the board approved the issue of 55 lakh convertible warrants at Rs 10/- per warrant to Promoters and Non-promoters
- What’s important is that 35 lakh warrants got allotted to Promoters and 20 lakh to non-promoters. So, the major allotment was to Promoters at ~64% against their then holding of 55%
- In Sep’20, the stock was still trading around 11-12 odd levels
- What’s interesting is the major growth in sales and profit of the company post Preferential allotment to Promoters in Oct’20. Prior to preferential allotment, operating profit was flat at around Rs 4 crore for the last 3-4 years.
- Post preferential allotment in Oct’20, sales increased from Rs 77 crore in FY 20 to Rs 128 crore in FY 23, operating profit increased from Rs 4 crore to Rs 20 crore and PAT improved from loss of 1 crore in FY 20 to profit of Rs 11 crore in FY 23
Source: BSEINDIA
Source: Screener
There might be many cases where the business and the stock may not have done well, post allotment of warrants to promoters during low phase. However, the idea is, screening for such stocks can be a good starting point for further research and to catch the turnaround stage early.
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Disclaimer: This is not a recommendation to buy/sell any of the stocks mentioned above. The securities quoted are for illustration only and are not recommendatory.
Ekansh Mittal
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