Turning bad news or a crisis into profit

Turning bad news or a crisis into profit is one of the key traits of a long tern equity investor.

What does bad news mean ?

Bad news or a crisis is something which creates panic in the market, especially by novice or amateur investors. Some of the examples of bad news could be:

  • Exit of a CXO / President / Founding member of a company
  • Failing to adherence to quality norms, in F&B, Pharmaceutical sectors etc
  • Some violence or Strike in the company
  • Etc.,

How can an Investor benefit from it ?

If we take the current situation of the Inter Globe Aviation (Indigo), where the company announced the  departure of  its President & Whole time director Aditya Ghosh. Adding to this, the company has performed poorly during the Quarter ending March’18. This has led to a steep fall in its share price in last four trading days:

Which shows ~20% drop during this period. This definitely looks like a good buying opportunity.

But, Is this single factor enough to make a buying decision ?

Yes and No.

Yes, if the Company:

  • Is well know in its sector.
  • Has good track record of earnings and profits
  • Is one among the top two companies in that industry

No, if the above mentioned points aren’t true for the company. In that case it may just be another company going towards bankruptcy. It would be better to avoid buying the stock.

Will I buy Inter Globe Aviation (Indigo)?

Of course, I’m buying Inter Globe Aviation (Indigo). Not just because of the steep price drop. But also due to other positive factors about the company:

  • Largest fleet operator in India, with over 1000 flights per day
  • Has performed better than peers on flight schedules
  • In Flight crew is well behaved when compared to SpiceJet or Jet Airways
  • Handles crisis well, for instance: smoothly handled situation when recently Aviation Regulator Directorate General of Civil Aviation  grounding of A320 Neo flights.
  • Future cash flow value per share is Rs: 1884, so current share price is at least at 25% discount.
  • P/E and PB are on a higher side, but this is the risk that an invertor should be ready to take.
  • Expected annual growth rate is ~19.8%
  • Revenue growth is expected to be better than its peers and to that of the Market

In my next Post, I’ll be talking about how to buy a falling stock