There is something about quality companies and temporary problems. The stock crashes, but eventually rises back and in most cases – gives excellent short term returns.
Temporary problems in industry leaders can also be an excellent entry point for long term investors.
We are going to take three examples in this article:
- Nestle and the Maggi Ban in India.
- PVR Cinemas and two situations that led to crash in stock price.
- Infosys and the Whistleblower issue.
Do note, the above mentioned companies are top-notch businesses that have done consistently well for a long period of time.
This investing strategy cannot be applied for lesser quality companies.
Nestle and Maggi Ban
In May 2015, food safety regulators found lead and MSG to be way above permissible limit in Maggi instant noodles. In June 2015, the central government banned the sales of Maggi.
The stock price crashed.
Many long term share holders of Nestle, sold their shares – as major chunk of revenue for the company came from Maggi noodles.
A few months later, the Bombay High Court struck down the ban and Nestle began producing Maggi again. Negative news related to the company continued till January 2016, even though Maggi was available in stores, the sales were down.
During this period, the stock price crashed from nearly 7200 per share to 5000 per share.
That was 3 years ago.
Today, the stock trades at ₹ 16,300 per share. Those who had the courage to buy Nestle shares during the crisis, have tripled their investment. 1 lakh invested at an average price of 5500 per share back then, would be approximately 3 lakhs today.
The 3 year returns would be 43.5% CAGR!
On July 13 2018, Maharashtra Government allowed people to carry outside food into multiplexes. Since major chunk of PVR’s revenue came from snacks and drinks that they served inside multiplexes, the stock price crashed from 1400 to 1200 in minutes!
Over the next two days, the price continued to fall till ₹ 1100 per share. On August 9 2018, Bombay High Court overruled the government’s decision saying outside food could lead to security concerns.
That’s it. The stock price was back to where it was.
Today, just a year and a half later, the PVR stock price is 2060 per share. More than 70% gains from 1200 and 90% gains from the lows during that extremely short term crisis.
Investors once again were concerned about PVR last year, when Reliance Jio announced first-day-first-show for latest movies. Why would people watch movies in theatres if they can watch it on Jio on the same day?
The stock price crashed from 1800 to 1400. Later it was revealed that Jio first-day-first-show was only for its high-end customers who pay 8499 per month for its broadband connection.
How many can afford 8499 per month? Watching movies in theatres is way cheaper!
The stock of PVR quickly rose back to its previous high and surpassed it! The rumour and negative news was an excellent opportunity for long-term investors to accumulate PVR shares.
Infosys Whistleblower issue
This was the most recent case that shocked the business world. In October 2019, the whistleblowers who claimed to be ‘ethical employees’ of the company – alleged that the CEO of Infosys was involved in unethical practices to boost revenue in the recent quarters.
The stock price crashed from 770 per share to less than 630 per share.
Nothing came out of the issue and today Infosys is once again trading at 776 per share.
Buying during crisis is difficult
Buying during a crisis isn’t easy. It requires a lot of courage.
If the allegations of the whistleblowers in the Infosys case were true, the implications would’ve wreaked havoc on the entire stock market – as Infosys is a company that has done India proud globally. If such a company was involved in financial malpractices, how can people trust other top companies?
If Maggi was permanently banned or people had stopped buying Maggi fearing health risks, Nestle would’ve struggled to recover. Even though the company has other top brands like Cerelac, Nescafe etc. Maggi is its biggest business in India.
The PVR issue was smaller, sillier and shorter in duration.
Currently, the Auto sector is going through a crisis and so are a few banks and NBFCs. The same with Shrimp companies like Avanti Feeds in the last couple of years.
Short term crisis in quality companies can give excellent opportunities. It requires a bit of research and more of common sense and courage, which many smart investors do have and benefit immensely from!