Sometimes opportunities are right in front of our eyes, but we tend to ignore them just because they seem too good to be true. For fundamental investing, we must keep aside our gut, feelings, and biases and instead focus on facts and numbers.
Back in Jul/2019, Pakistan Stock Market was bleeding against the harsh realities of tough macroeconomic adjustments, and I was screening for some fundamentally sound stocks which could at least double in response to economic stabilization.
It wasn’t easy since it required a lot of imagination in terms of company responses to the economic environment. While corporate profitability was taking a hit, Highnoon Laboratories (PSX: HINOON) had reported more than 40% growth in its profit for the Jun/2019 quarter. It wasn’t any one-off, rather pure revenue and margins driven growth.
HINOON’s stock price had less than halved since its peak in 2017 whereas its profit after tax was up nearly 60% in 2019, thereby causing its price-to-earnings ratio (P/E) to shrink from close to 30x to less than 10x.
A systematic risk had led to over-correction in this fundamentally strong company. The forest fire burns even the sandalwood tree, creating opportunities for value investors esp. contrarians.
I discussed my thesis with a few friends and concluded that people were trying to justify the market valuation as they couldn’t digest that financial performance in such a turbulent economic period.
As soon as the market stabilized, it took the stock only 5 months to yield 150% return. It was arguably one of the safest bets at the time. There were a lot of similar stories in 2023 when there was panic across the board.
This theme also resonates with the famous saying, ‘buy when there is blood in the streets, even if the blood is your own.’