Buy During Temporary Trouble
The next best time to buy a stock is when the company is affected by temporary trouble. Temporary trouble are events that the management of a company usually doesn’t have any control over. Two examples are natural disasters and political unrest. When such an event occurs, it will usually cause the share price to tank, giving you the opportunity to buy into companies if they become undervalued.
1. Natural Disasters
Let me give you an example. Thai Stanley Electric is the market leader for automotive lights in Thailand. In 2011, the company was hit by two natural disasters. First, the 2011 Japan tsunami damaged the Japanese automakers, many of whom are Thai Stanley Electric customers. Second, the 2011 Thailand floods wiped out many factories in the country including Thai Stanley Electric’s. These two natural disasters back-to-back caused Thai Stanley Electric’s share price to plunge 35% in that single year.
Yet if you looked Thai Stanley Electric’s fundamentals, it was still the industry leader with a 95% and 55% market share in motorcycle lights and car lights respectively. The company had a net cash position with zero debt and was still paying a dividend despite the bad situation.
If you have bought Thai Stanley Electric during the time of the disasters, you would’ve made over 80% in just a year once the company recovered.
2. Political Unrest
In 2013-14, Thailand was facing political unrest where anti-government protester marched to overthrow the then-prime minister Yingluck Shinawatra. This took place for seven months and affected the tourism and retail sectors in Thailand.
Major Cineplex is the market leader in cinemas in Thailand and their business was not spared from the protests. Its share price plunged about 33% in the single year. But if you have look at the fundamentals of Major Cineplex, you would have known that they command about an 80% market share in Bangkok, its business wasn’t too greatly affect by the protests, and the company was still paying a consistent dividend of 5%-6%. We took the opportunity and invested in Major at around THB18. We held the company for three years and made a 105.07% return inclusive of dividends.
So the next time you see a company hit by trouble, do your research and find out if the situation is temporary and whether the company can recover fully from the setback. If so, you might have an opportunity on your hands.