OK guys, I confess. I have been procrastinating on my next entry. I have loads of ideas to share but I’m just putting it off. Well here it is…
Today I want to talk a little about turnaround stocks. Remember that I talked about identifying the a turnaround by looking at the moving averages. To me this is the markets confirming the turnaround. Many times, we see false turnarounds and it is not easy to distinguish between real ones and fake ones. I’m sure those who have been in the markets for a long time can attest to that. Let me show you some real life examples below:
The company is a premium retailer of many prestigious and exclusive brands in Indonesia such as Zara. Topman etc. Before 2013 the company overexpanded and started facing severe inventory and cashflow problems. This was compounded by the taper tandrum which caused emerging market currencies to depreciate, much like the situation now. The stock dropped 72% from the peak in 2013.
The question of course was what the right entry point was. Was it when the stock had declined 30%, 40%, 50%? When the stock dropped 70% I’m sure many people were expecting the stock price to drop further. After all, who is to say that the stock will not drop 90% or go to zero?
Anyway, I had made the mistake of going in too early into stocks. I can assure you it’s not fun to be anticipate a turnaround before it actually happens. Why not let the share price itself tell you when they are ready to turn around? Yes, you will typically miss the first 20-30% of the rebound from the bottom. But hey, that is better than going in at -70% only to find that the company may actually never recover from that!
My current rule of thumb is to go into the the stock when the 100 day moving average cuts the 200 day moving average from below – which is roughly about Rp420 (doesnt have to be exact) around Sep 2016. Current price: Rp795 even after the recent decline after hitting a recent high of >Rp900. Close to doubling your money in 2 years. Not a bad return?
Around the same time in 2015, Brilliance China stock price declined on worries of China’s anti-corruption drive. The new Leader Xi Jinping had made it his personal crusade to root out corruption amongst Chinese officials and this has caused many retailer of luxury goods to see sharp declines in share prices as officials try to stay low. Brilliance China is the exclusive distributor of BMW cars in China as you may know.
The share price declined close to 65% from its 2015 peak. Our indicator gave a buy signal around Sep 2016 at around HK$10. Went to a recent peak just shy of HK$24 around Aug 2017.
Interestingly enough, the stock declined again recent back to a recent low of below HK$10. Here’s our chance to make a second round!
Same story as Brilliance. The anti-corruption drive caused the share price of Macau casino operator Galaxy Entertainment to fall from a peak of HK$80 to HK$20. It went back up to the recent peak of above HK$70 and looks like it’s coming back down for a second dive, much like Brilliance China’s case. Buy signal was issued around Sep 2016 at around HK$30.
For those of us following India, here’s another example. Nestle India’s stock fell due to a recent scandal in 2016 when regulators found that the company’s Maggi instant noodles may contain more than seven times the permissible level of lead and was considering banning Maggi in India. Fortune magazine had estimated the episode to cost the company close to half a billion dollars in damages.
The stock declined 33% from its recent peak but somehow recovered very soon after. You can see from the share price chart below that the buy signal was not generated until June 2017 when the share price was INR6,600, more than a year after the share price bottomed at around INR5,000 in Feb-Mar 2016 (it hit INR5,000 several times, threatening to break support at that time but ultimately didn’t). Could it have gone below INR5,000 subsequently after Feb-Mar 2016? Honestly, who knew? It could have! The share price recovered above INR7,000 (almost it’s pre-crisis high level) and came back down again to INR6,300. Could it have tested INR5,000 again? Yeah sure … why not? But on hindsight it didn’t happen. LIke I said, it didn’t confirm that the crisis was over until much later in June 2017. After which the stock went on to create another new high. The last closing price was INR10,470! Not a bad return should we say?
Teva Pharmaceutical Industries
Finally, a look at Teva, a generic pharmaceutical company listed in the US. The whole generics industry in the US has been hit by price cuts and health care system reforms. I shall not go into the details here. What is more important is that after declining close to 85% from its recent high, the stock has given a buy signal at around $20 in April 2018 after bottoming around Oct 2018. And guess what Warren Buffett bought into the stock in 4Q18 and added more to his position in 1Q18 according to exchange filings!
So the point I wanted to make is that this rule works not just in a single market but in many Asian markets (and even the US markets)? If you have the time, you can look back at the turnaround stocks you have experienced personally and see if this rule works for you!