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A small sized manufacturer had shown extraordinary track record during 2011 to 2013. It was the time when the entire industry was going through the worst phase of the decade. Backed by strong and improving fundamentals and expecting a turnaround in the sector in FY15, I had recommended the same. However, between 2013 to 2014, the stock price had already moved up from 75 to 145, thus generating a return of around 100% in four months.
The stock price has already doubled in the last four months. From this rate, how it would move further?
I do not want to invest stocks that have doubled in the past, I want to invest in low priced stocks that can double in the future.
Within ten months of the recommendation, this manufacturing generated 170% return. Thus, yielding three times return within just ten months.
The key point that you need to understand is that the stock price movement does not depend on how many times it has multiplies in the past. Rather, it depends on the future prospects of the company. During the same phase, the company manage to grow at a rate of 50%+, an ROE of 30%+ and had zero debt on its balance sheet. It is obvious that during the economic revival, such stocks get enough boosters to multiply investor’s wealth. During the slowdown of manufacturing industries, the company positioned itself to national player.
The expansion of capacity without any external dent, coupled with inefficient working capital management placed the company into a sweet spot. So, in such a case, even when the stock generate ten times return during the slowdown phase, I considered it an attractive investment bet during the revival of the manufacturing industries. If a company can perform well under adverse microeconomic conditions, it is expected to perform even better once the external business environment turns favorable. Winners emerge in taught conditions.
