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Investing is often a tug-of-war between fear and opportunity. Should you avoid a troubled company to stay safe, or seize the chance to buy a great business at a throwaway price? In 2020, many investors shunned Finolex Cables – a leading wires and cables maker – because of a bitter family feud hanging over it. But by looking past the fear and focusing on fundamentals and valuation, we turned that risk into a reward. Three years later, Finolex became Value Research Stock Advisor’s most profitable exit, netting nearly a 4x gain for those who took the contrarian bet. This is the story of that investment, the lessons learned, and how it echoes in an opportunity we see right now for long-term investors.
Out-of-Favour, but fundamentally strong
Back in June 2020, Finolex Cables was hardly a market darling. The stock had been knocked down by a promoter feud that scared off investors, and its growth had stalled amid a real estate slowdown. Yet, beneath the surface, the business was rock-solid. Finolex was India’s third-largest cable manufacturer with a trusted brand and a cash-rich, debt-free balance sheet. Nearly one-third its market cap was sitting in cash, and it consistently earned high profit margins on its quality products. In short, the company’s core was sound – only its stock was “broken.”
What made Finolex a great opportunity in 2020?
- Unjustified pessimism: A decade-long family dispute over control created a cloud of uncertainty. However, the infighting had not impacted day-to-day operations – the company was professionally managed and continued to perform well. The market’s fear was largely about what could go wrong, not what was actually happening on the factory floor.
- Strong fundamentals: Finolex enjoyed a leadership position in its segment (it’s the market leader in low-voltage electrical wires) and boasted enviable financial strength. It had zero debt and over Rs 1,300 crore in cash reserves, ensuring a limited downside even in tough times. Its efficient operations and premium product quality gave it industry-leading profit margins.
- Attractive valuations: With the stock beaten down, Finolex was trading at a fraction of its usual valuation. It was available at just nine times the price to earnings. All the bad news (and then some) was already priced in. For a patient investor, this created a classic value opportunity: a great business on sale for irrational reasons.
This scenario was a textbook case of what we at Value Research love to exploit. As we highlighted in a recent analysis, buying strong companies at the right valuation tilts the odds of long-term success in your favor. Finolex in 2020 checked all the boxes – quality business, temporary troubles, and a bargain price. So, despite the murkiness around its promoters, we took a calculated risk and recommended the stock in June 2020 for our subscribers.
When smart risk-taking pays off
Finolex Cables validated our bold call. As the dust settled, the core business held firm, the electric goods segment improved, and fears around the promoter dispute didn’t play out initially. The market's mood flipped from fear to confidence, and the stock surged.
By late 2023, the stock had nearly quadrupled. This wasn’t luck or a one-off spike, but the result of buying a fundamentally strong business when it was deeply undervalued. Those who looked past the noise saw big gains; others missed out.
Of course, there were bumps – rising input costs and uneven demand. But our entry at a steep discount limited the downside. With negativity already priced in, even a moderate recovery triggered a sharp upside. That’s the power of smart risk-taking.
Knowing when to fold: Why we exited at 4x
If buying a troubled stock low is one half of a great trade, knowing when to sell is the other half. By November 2023, we felt the risk-reward equation for Finolex had flipped. The very factors that made us comfortable taking the risk earlier had either vanished or reversed:
- Risk realised: The long-simmering promoter feud finally boiled over into the open. In late 2023, an ugly boardroom battle saw one faction oust the other – the company’s executive chairman was voted out by shareholders amid court drama. What had been a background concern was now directly interfering with management decisions.
- Diminished business momentum: Perhaps as a consequence of the distraction, Finolex’s competitive position showed cracks. Its growth began lagging behind peers, and it was losing market share in some segments. Despite sitting on over Rs 2,000 crore in cash, the company wasn’t deploying it meaningfully.
- No longer a bargain: Most importantly, the valuation had swung to the other extreme. After its steep rise, Finolex stock was no longer cheap. It had priced in a rosy future, which left little room for error if things went wrong.
With these red flags waving, we decided to book profits. In November 2023, we advised our subscribers to sell Finolex Cables – locking in a stellar gain of about 3.7x from our initial recommendation. It was a bittersweet decision, given our attachment to the stock, but a necessary one.
Investing takeaways from the Finolex saga
Every investment is a lesson. Finolex Cables reinforced a few vital investing principles:
- Be greedy when others are fearful: The best opportunities often arise when a good company is going through a bad time. If the core business is intact and the issue is temporary or exaggerated, dare to venture in – especially if the stock’s valuation already reflects worst-case fears.
- Manage downside risk: "Higher the risk, higher the reward" doesn’t mean one should take any high risk. The trick is to take smart risks with limited downside. In Finolex’s case, the downside was protected by its strong balance sheet and cheap valuation.
- Stay vigilant and objective: Just because you bought a stock for the right reasons doesn’t mean you hold it forever. Continuously re-evaluate your thesis. When the reasons for buying the stock cease to exist, exit.
By following these principles – value-driven stock selection, downside protection, and disciplined exit strategy – you can navigate even a volatile market with confidence.
The next Finolex? History repeats itself…
Opportunities like Finolex Cables don’t come every day, but they do come. In fact, we’re seeing a similar pattern unfolding right now with one of our latest recommendations. Without naming names, consider this scenario: a fundamentally solid business that’s currently out of favour because of a short-term setback. This company, a leader in its industry, recently hit a speed bump due to an overhyped negative news event. The market punished the stock. Result: its valuation has become unusually attractive, even as its long-term growth drivers remain firmly in place.
We have added this stock to our Long-Term Growth portfolio, which is a collection of the most compelling undervalued growth stocks we’ve identified. This new pick is already part of the portfolio, quietly awaiting its turn to shine. We believe that as the temporary clouds over it pass, patient investors could be rewarded handsomely, much like those who bet on Finolex.
Your move – Don’t miss out
It’s not often you get a second chance at a Finolex-like story. The window to invest in these situations, while the crowd is still looking the other way, is limited. Our Value Research Stock Advisor team has done the homework, identifying this stock and others like it that have strong fundamentals and are poised for fast growth, yet are priced for pessimism. The Long-Term Growth portfolio contains this latest opportunity, along with several other undervalued gems.
The lesson from Finolex Cables is clear: smart, value-driven investing can transform fear into fortune. The key is having the right information, a disciplined strategy, and the courage to act. If you don’t want to miss the next Finolex-like multi-bagger, now is the time to step up. Let our research guide you – subscribe to Value Research Stock Advisor and get full access to our Long-Term Growth portfolio and in-depth stock recommendations.
(Note: The examples discussed, including Finolex Cables, are past recommendations from Value Research Stock Advisor. They illustrate the approach and are not current buy calls. Do not invest just based on this article.)
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Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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