Recently there has been several interesting cases of stocks that saw a sudden collapse in share price. This normally happens when a totally unexpected event hits the stock and the company is thought to be at risk of going under for some reasons. Remember that this may not be the reality but because of extreme fear, investor suddenly think that a company that was perfectly viable in the last month is suddenly in danger of collapsing. In most cases, this would hardly be the case. This is especially true the bigger the company (measured either by market cap or revenues). Here are a few:
- My E.G.
An IT solution provider with most of the revenue generated from government contract. The company was assumed to be dependent on political favour from UMNO, the then ruling party in Malaysia. This however changed overnight when the opposition party unexpectedly won the elections. The once high flying stock declined from RM2.60 to an intraday low of RM0.66. The stock promptly recovered but the initial recovery was fraught with uncertainty. The first sign of confidence came with the major shareholder did a major share buy back. Subsequently, the company also announced wins in new projects which dispersed the earlier worries that the new government might go on a witch hunt for supporters of the previous regime. This turned out not to be the case. As it turns out, the main reason why the company won contracts was not because of their political connections but because they were offering these services to the government at or near cost which made it difficult for the government to say no to. They were making money from the data collected which they subsequently sold to 3rd party like banks offering car loans. Like they say, it’s hard to compete with free (or cost).
2. Gabungan AQRS
This is a Malaysian construction company that again was thought be a major beneficiary of government mega projects given out before the elections. After the shock election lost of the incumbent party UMNO, the new government said that they will review all projects given out previously and to cancel most of the projects which they thought were too expensive. The new PH government was on a drive to cut back the budget deficit and government spending after years of being in debt and overspending. The company was thought to be in danger of losing a few major contracts and being a small cap company, this could affect the company finances significantly. Stock collapsed from RM1.55 to an intraday low of close to RM0.61. As it turns out, even if they company didn’t add any of the recent projects signed before the election, it was already trading at a PER18 of 3.5x according to one analyst estimate with dividend yields of 5%. The selling had been indiscriminate, needless to say. Again, the first signs of turnaround took place when the major shareholders starting buying back shares. Subsequently, there were increasing talks that the major projects will not actually be cancelled but will be modified so that it costs less.
3. Beauty Community
This is a Thai cosmetics company that had been a hot stock. The company announced its first ever miss in earnings due to a slowdown in sales to China. At the same time, the industry was also hit by cosmetics/supplement related deaths caused by unlicensed players using substandard material. Right before this happened, major shareholder Suwin also said that he wanted to sell down his stake in the company from 70% to 20%. Fears turned to panic when for another rumour was spread that the numbers announced previously had been faked. The company came out to clarify that they are expecting sales to recover in 2H18. The company also announced a share buyback. Share price had declined from THB23 to a low of THB6.80.
The takeaway for me in these cases is to keep a look out for fallen angels. Think about whether the company’s competitive strength is still intact after the recent event. If it is, it might be a good chance to be greedy when others are in fear.