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Weekly Insights #3- Neglect & Disruption is a Great Hunting Ground

The most potent combination for multibagger returns is opportunities with qualities of both- Value + Growth. But it is also the most difficult combination to find.


Such opportunities arises either when-

  1. You are very early into a stock ie. you have discovered a stock way before market discovers & values it.

  2. There is some short-term temporary disruption in a business with good long term growth prospects.


Two classic examples of such growth opportunities that saw short term disruptions are Nestle’s Maggi Ban in 2015 and Divis Labs Import Alert in 2017. But such disruption events are rare.


However, currently we are in an environment wherein there are a lot of businesses & companies with good growth potential and are facing near term disruptions & challenges. And these disruptions are on the back of a unique situation that we have seen over last 3-years.


During the initial period of Covid led disruption, we saw that there were certain businesses that actually benefited quite a lot; these includes-

  • Pharma companies that saw demand uptick for their products; same with diagnostic companies.

  • IT sector saw renewed growth with expanding margins.

  • Platform companies saw major margins expansion on the back of cost savings.

  • Companies that benefitted from commodity price increases like PVC Pipe companies that benefited from inventory gains and thus very high margins.

  • New Age Tech companies benefited from for easy liquidity and that allowed them to list at extraordinary valuations.


And there are many more such cases.


But now as Covid led disruptions are in the past, these same set of businesses (which earlier benefited from disruption) are facing disruptions.


  • Pharma companies are seeing demand issues due to high channel inventory; one-time covid led business is gone.

  • IT companies saw demand slowdown and margins pressure.

  • Platform companies are seeing margins contract as costs are coming back.

  • Commodity prices are now correcting and thus companies are facing inventory losses vs gains earlier.

  • New Age Tech companies saw valuation correct as the liquidity dried up.


In a lot of these cases, the recent disruption/challenges have gone overboard on the downside. Earlier these companies were making super normal profits & were trading at above avg. valuations; but now some of them are making sub-normal profits & are trading at below avg. valuations.


And this is where the opportunity exists wherein one can find companies with Value + Growth, such that value part will play out as mean reversion happens from current disruption and then you have a growth angle on top of it.


Another area wherein one can find such Value + Growth opportunities is stocks wherein there is an element of Neglect. These are opportunities wherein there has been some very interesting development & change in the underlying business, but the same is not reflecting in the overall numbers due to the ongoing disruptions at the industry level.


A good recent example to understand this would be that of Vadilal Industries.


So Vadilal being an ice-cream’s business was facing disruptions in the initial periods of covid due to lockdown. But its US business which started gaining traction before covid continued to scale well during the period and generated very good profits. But this underlying change was not visible in the overall numbers as the domestic business was disrupted. In 2022, as soon as the domestic business normalized, the overall numbers started looking extremely well as the US business performance was no longer being suppressed. And that led to the stock doing extremely well in 2022.


You can read our shared research on Vadilal and other stocks here-


And there are many such Neglect opportunities that are shaping up-


1. We recently bought a consumer company wherein over the last 3-years, the company has made substantial change in the way it does its business and the initial response of this is great. However, the same is not getting any attention due to the disruption in the overall industry itself.


2. Similarly, we recently bought a lender wherein the growth has come back after many years post covid and it continues to deliver well on growth. However last year it saw some issues at the management level and thus got neglected, resulting in it trading at valuation levels that it has only traded at the lows of Covid Fall and thus ripe for re-rating.


3. One stock in the building materials space that we are working on has seen a large change in the nature of business which coupled with continued scale up in smaller business verticals will increase the overall margin profile of the company. But the same is not reflecting in the overall business due to inflationary challenges at the raw materials side.


In summary, the current market environment has resulted in a lot of such disruption and neglect opportunities that one can benefit out of. But keep one thing in mind, be very selective such that you only invest wherein post the initial normalization & mean reversion, there is a good growth outlook for medium-long term. Without growth, things might not work out just based on the value aspect.


Tip: if you want to fast-track this discovery process and want to know about such stock ideas with the most comprehensive research reports, do consider subscribing to Surge’s Membership.


We have a comprehensive offering that includes-

1. Curated List of 15-20 Stock Ideas

2. Comprehensive & Insightful Research Reports on these stock ideas

3. Regular updates on recommended stock ideas

4. A Growing Knowledge Base wherein we share additional insights

5. Interactive Quarterly Concalls with our Members


That’s it for this week, do let us know in the comments section if you have some ideas in these areas of Neglect & Disruption with a growth angle.


New insight coming up next week. So stayed tuned!



 

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

Vadilal Industries- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Nestle- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Divis Labs- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

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