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On This Day - 12 MAY 2020
Covid-19 Offers a Rare Opportunity to Own This Brand Leader

Richa Agarwal, Research analyst

For around 1,300 years, Europeans believed that Black swans did not exist. That was until William de Vlamingh, a Dutchman went on exploration with his crew. In 1697, they were known to be the first Europeans to see the black swan disproving the long existing theory.

In the financial world, Black swan events are previously unseen, random events that occur and can have severe consequences.

The 2000 dot-com bubble or the 2008 global financial crisis can be termed as two of the major black swan events in recent history.

But are we seeing the mother of all Black swans in current times?

The coronavirus impact is spreading rapidly. Even as I write this...the new cases are rising everyday. We are already in an extended lockdown, and I'll not be surprised if there is a further extension.

How should we see this event that challenges our survival...That makes us choose between lives and livelihoods?

Even though the mortality rate of Covid-19 relatively benign, the repercussions it has for global economies are severe. And until a vaccine is developed (likely to take at least 18 months as per optimistic estimates), we might have to learn to live with the new normal.

I don't mean to sound grim. In the past, there was always a doomsday scenario predicted with any black swan event ...which most of the times never came true.

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Like humans have shown throughout history, we will find a way out (China apparently has recovered from the worst as I write this).

Yet, amid a high degree of uncertainty, investors would be better off being conservative, focusing on margin of safety and being very selective about businesses they choose to invest in.

Until a few months ago, as a smallcap analyst, my focus was on businesses with strong moats, managements, healthy financial performance and attractive valuations.

Covid-19 has made me add one more criterion - Is the business strong enough to survive if there is a slowdown due to the virus, and potentially emerge stronger from it?

Fortunately, there are such opportunities present in the smallcap space.

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For instance, one of the companies we recently recommended in Hidden Treasure is the largest player in a niche food segment and owns a very well-known brand. Given the nature of the business, even during the most stringent phase of the lockdown, the company has witnessed a jump in online sales. What also works in its favour is a competitive advantage that is not easy to disrupt, especially in these times. Hidden Treasure subscribers can access the recommendation here.

The legendary investor, Peter Lynch, once said: "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

What further adds comfort in this smallcap stock is significant insider buying in the last few months, both in pre and post lockdown. Not to mention a strong margin of safety in valuations due to coronavirus induced correction in the smallcap space.

Investing is said to be driven by two key emotions - greed and fear. There is a third - regret on missing great buying opportunities, that mostly comes in hindsight. I hope you will make the most of the opportunity in this smallcap and others like it.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Read about my #1 stock pick for 2020 here.

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