When I diligently reported that Kenneth Andrade, the former whiz-kid fund manager with IDFC MF, has made his debut as a private investor by scooping up a massive chunk of 59,058 shares of Alphageo India Ltd, a micro-cap engaged in seismic survey of crude oil fields, there was a sense of apathy all around.
“Crude oil prices are at record lows and exploration activity is at a virtual standstill. Who is interested in a micro-cap engaged in seismic activity” was the sentiment of the novice investors.
Now, if we had pondered over the situation, we would have realized that Alphageo was actually a no-brainer buy for Kenneth Andrade.
Firstly, the fact that crude oil prices are presently at record lows does not mean that the situation will continue as such for ever. In fact, crude oil prices are on the ascent and have notched up handsome gains in the past three months.
(Crude Oil prices 3-month chart)
Secondly, it is an elementary rule of investment that when top quality stocks with impeccable management credibility are suffering due to temporary problems, that is the time to buy them aggressively.
Here, we must recall the wise words of Howard Marks, the Billionaire investment philiosopher. Marks explained that a stock languishing at 52-week lows is actually a very “safe” stock because all expectations have been drained from it and the downside risk is low. A slight spike in performance or a hint of good news is sufficient to send such stocks into the upper orbit.
Thirdly, the fact that an accomplished investor like Kenneth Andrade had taken a high conviction bet by investing his personal funds ought to have alerted us that there is something special about Alphageo.
Today, Alphageo has the rare distinction of being locked in multiple upper circuits of 20% each. The gain in just 4 days is a mind-boggling 75%. This translates into an annualized return of 6843%.
(Alphageo’s 5-day chart)
The indications are that more mega gains will gush out of Alphageo. A. Dinesh, Alphageo’s top brass, hinted that the mammoth Rs 1,482-crore order from ONGC for acquisition of 2D seismic data, is merely the tip of the iceberg and that there are “lots of other opportunities” coming the Company’s way.
Dinesh also disclosed that Alphageo rakes in 30% EBITDA margins and 10% PAT margins. So, the P&L A/c is likely to sparkle during the three years that the ONGC order will be executed.
Anyway, the important lesson from the episode is that sectors and stocks that are languishing at 52-week lows may actually provide excellent investment opportunities, if we have the vision to spot the proper stocks and the patience to hold on to them.
We saw real-life examples of Porinju Veliyath implementing this strategy in the case of Gokaldas Exports and Biocon. Both stocks, which were in the doldrums, are today soaring at new heights because of a slight uptick in their performance.
The realty sector and the commodities sector, both of which have several top-quality companies in it quoting at 52-week lows, provide fertile hunting grounds for us. These stocks have limited downside risk and infinite upside potential!