Immunity Against Bad News

In the world of investment, bad news that affect the stock market often create good investment opportunities for us. The main job for investors in times of bad news is to analyze how that piece of bad news is going to affect the company in which we have stakes in or are interested in, so that we can adjust our portfolios accordingly.

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In the world of investment, bad news that affect the stock market often create good investment opportunities for us. The main job for investors in times of bad news is to analyze how that piece of bad news is going to affect the company in which we have stakes in or are interested in, so that we can adjust our portfolios accordingly.

For example, with the news of coup de tat, we may think that the tourism industry will probably be affected, especially companies whose revenue comes from overseas tourists; or businesses that have areas or warehouses for rent, a hospital, or a condominium expansion project that is within a soldier controlled area. The extent of the affect depends on how much their revenue contributes to the overall income of the company.

On the other hand, energy businesses like electricity or tap water won’t receive much effect because people still need to use these necessities. Media business should become more profitable (because people would watch more news, or people would need to stock up on certain products in case of a political emergency situation, for example).

What I simply do in these cases is go back in time to assess the “immunity” in similar events in the past, and evaluate the financial statements on companies in similar times to see how they have performed especially in terms of profit.

For example, if we look at the profit of The Erawan Group (ERW), we will see that during political crises, the profit will drop significantly from 402 million Baht to 78 million in the years 2007-2008, and make a loss of 229 and 275 million Baht during 2009-2010.

https://www.jitta.com/stock/bkk:erw/factsheet

If you recall, there was the closing down of the airport incident in 2008, which impacted the number of tourists visiting Thailand. Up until 2009 and 2010, there was a mob at Rachaprasong junction that made people cancel their trips and events at the Grand Hyatt Erawan Hotel, which is a source of revenue for ERW.

This shows that ERW doesn’t really have “immunity” against these political situations, and in this case, it received quite a huge impact, causing the company to lose money. Therefore, we can somewhat conclude that if a political crisis happens again, we should stay away from ERW.

Additionally, if we look at other incidents, such as the Hamburger Crisis in 2008, or the big flood in Thailand in 2011, we can see that ERW also does not have “immunity” against these situations because its profits have decreased significantly after these events.

When we see these kind of numbers, we can conclude that ERW is a company that has “low immunity” against economic problems or other national crises. If we’re going to invest in ERW, then we should do so when the economy has a clear upturn, and we should consider selling it when we see some danger signs of national incidents.

But let’s backtrack a little bit. If we look at the coup de tat of 2006, we will see that during 2006-2007, ERW’s profit decreased from 410 million Baht to 402 (which isn’t that much). This shows that when there is a coup of the soldiers (without the bloodshed), ERW is not as affected, meaning that it has immunity against this sort of coup.

Therefore, when we see that a stock price drops because of bad news, we shouldn’t rush to buy it. We should assess how much “immunity” this stock has against bad news, so that we can be confident that this company can still produce good profits in the next trimesters.

What’s best is if we can invest in companies that have high immunity against bad news, because no matter what happens, these companies will continue to create increasing profits every year. For example:

These 3 companies have been through the Hamburger Crisis, political crises, the flooding, and other incidents. However, we will see that there were no events that significantly affected the profits of these companies. On the contrary, these companies were able to increase their profits consistently every year. So we can be 99% sure that THIS coup de tat is not going to impact these companies.

In conclusion, if we decide to invest a huge amount of money into certain companies and still want peaceful worry-free nights, we should choose companies that have “high immunity”, because whatever the news headline is, those companies will still continue to build wealth for their shareholders continuously.

As for applications in Jitta, looking at the “immunity” is a very easy task. Just look at the Historical Jitta Score of the year-of-crisis, including the years before and after. If the company still has a Jitta Score of 5 and aboce during that time, it proves that the company has “immunity” against that incident. If the Jitta Score is higher than 7, then even better! The company is highly immune.

Apart from this, we will also be able to assess how much damage these incidents have on the companies by evaluating the following:

  • If the Jitta Score decreases by more than 1, it means that the incident has quite an impact on the company (to a certain extent)
  • If the Jitta Score decreases by more than 2, it means that the incident has a drastic impact on the company

For example, if a company has had a constant Jitta Score of 8, and all of a sudden a crisis happens and causes the score to drop to 6, you can conclude that that incident has a drastic impact on the company. However, it is still within the boundaries that the company can still manage to operate. What we have to look further into is the recovery after the crisis –see whether the Jitta Score returns to its former value before the crisis (and how long it takes to do so). The faster it recovers, the better the company is at recovering after the crisis. For most good companies, they will be able to return to their normal great states within 1 or 2 years.

So, if we want to invest happily and not have to worry so much about bad news, we should pick companies that have “high immunity” against all adverse situations. Whatever happens, our money will be well protected in these stable firms.

Author: Jitta

Jitta simplifies financial analysis for value investors and financial advisors alike. Our stock-analysis platform offers actionable advice to help them make better investment decisions and generate higher returns based on a simple principle: “Buy a wonderful company at a fair price.” And we do that by creating Jitta Ranking, our proprietary algorithm that ranks stocks based on their profit potential. Returns generated by Jitta Ranking since 2009 has outpaced that produced by the S&P500 index by a large margin. Jitta’s technology processes information like a human mind, assessing complicated data and digesting it into an easy-to-use and intuitive format. Its key features include Jitta Score, an indicator of a wonderful company; Jitta Line, an indicator of a company's fair price; financial statements-made-simple Jitta FactSheet; Jitta Playlist, an intelligent screener and backtest system in one; and Jitta Portfolio, a smarter investment-tracking mechanism.

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