Simple frameworks to generate new investment ideas effectively
In today’s edition of TOPICAL Wednesday, we’ll look at a couple of our Idea generation processes.
At Bastion Research, we believe idea generation should be done using a well-structured process. Today, we are thrilled to share a couple of simple frameworks that fuel our new idea kitty.
Framework 1: Breakout Results: Spotting the Rising Stars
Let’s start with a concept we call “Breakout Results.” No, we’re not talking about chart patterns here. We’re on the lookout for companies that have been underperforming for a few quarters or even years, and then—boom!—they suddenly start showing a surge in sales and improvement in margins. It’s like watching a phoenix rise from the ashes.
Why does this happen? It could be due to new capacity coming online, a turnaround in industry demand, competitors closing down their operations, management change, or company coming out of transitory pain etc. The key for us is to identify companies where this growth isn’t just a flash in the pan but the start of a sustainable, secular trend.
Every quarter, we roll up our sleeves and dig into the reasons behind such growth. Is it here to stay, or will it vanish as quickly as it appeared? Our goal is to find those gems where the current quarter’s or past few quarter’s growth is just the beginning of a promising journey. We’ve attached a sheet of companies that have delivered respectable growth and margin expansion during Q1 FY25 for you to explore.
Framework 2: The FD Test – Companies Underperforming FD in the last 5 years
Now, let’s talk about another intriguing exercise: identifying companies that have failed to beat Fixed Deposit (FD) returns over the last five years. Yes, you heard that right. In a booming market, some companies still struggle to beat even the modest returns of an FD.
At first, you might think this list would be filled with shady companies with governance issues. But you’d be surprised at the names that pop up. This exercise is a treasure trove for value hunters. We are looking for companies experiencing temporary pain, whether due to industry headwinds or internal challenges.
The market often becomes too negative about these businesses, creating a sweet spot for investment. It’s a classic case of better risk-reward: not much to lose, but plenty to gain.
“HEADS I WIN, TAILS I DON’T LOSE MUCH”
This exercise also helps us identify entire sectors that are out of favor. If multiple companies from the same sector appear on this list, it’s a sign that the sector might be in pain. If we can spot signs of turnaround, it could be an exciting place to look at and invest. After all, there’s nothing more exciting than a beaten-down sector ready for a comeback.
Remember the saying, “The most dangerous man is not the one who has everything, but the one who has nothing to lose”? In investing parlance, the most exciting companies are those with nothing to lose. They have the potential to surprise us all.
We’ve attached a list of such companies for you to explore. Dive in and let us know what you think!
Both of these exercises have a few companies in common. These are the companies that have shown poor stock price performance over the last 5 years but have recently posted strong quarterly results. Let us know if you can identify these common companies.
Do your Own Due Diligence (DYDD)
Please note that this is just the starting step for idea generation and not the end in itself. We strongly encourage you to do your own due diligence while investing.
If you have a better understanding of any companies on the list, send us an email to conncet@bastionresearch.in and let’s connect to discuss. We would love to hear your insights and engage in a fruitful dialogue.
Thank you for joining us on this journey of discovery. We hope these insights spark new ideas and opportunities for you. Until next time, happy investing!
Meme of the Week
Follow us
If you are a diligent investor, you would not want to miss checking out our research platform, where we share insightful research on companies regularly. Gain access to our sample research by clicking on the button below.
