How To Profit From Unloved Companies

Back in early 2014, SMRT Corporation Ltd (SGX: S53) was definitely not a well-loved share in Singapore’s market.

The operator of bus and train services in Singapore had been plagued with constant maintenance issues at the same time it saw its profit margins getting squeezed. Consumers were also not pleased with the operator’s request for a price hike and shareholders were unhappy with the company’s lack of progress on the same issue – it was really a case of the firm being caught between a rock and a hard place. You can read about some of SMRT Corporation’s past issues here and here.

At that time, I had taken a look at the company and wrote about its chances of seeing a turnaround in its business and share price.

Today, SMRT has seen its shares rebound from a 2014-low of S$1.01 (reached in early April) to its current level of S$1.66. That’s a stellar gain of more than 60% in less than a year for a company that wasn’t well-liked by the market at all.

SMRT’s experience is a perfect example of how we can profit from investing in companies that no one loves.

The secret to a happy marriage is to have low expectations

Bear with me for a little while, but you can think of investing in a similar manner to a marriage.

The most obvious similarity is that one has to think long-term with both. After all, a marriage is a once-in-a-lifetime affair for most, while investing in a company is a multi-year, sometimes multi-decade, sometimes even life-long thing.

A slightly more subtle similarity has to do with expectations.

In a marriage, if your partner has always showered you with gifts and performs grand romantic gestures all the time, you might continue to expect such things in the future. As time passes, and if your partner can’t meet or exceed your expectations any longer, you’d most likely end up being rather miserable.

It’s the same with investing. A fast-growing company you had invested in can end up being a disappointing investment if its future growth ends up being lower than what the market expects.

The situation SMRT found itself in in the early half of 2014 is one of low expectations. Investors were disenchanted with the company (shares of the transport company had fallen by more than half from a peak of around S$2.30 reached in July 2010) and there was nothing much expected from its future.

When expectations are low, any slight positive news can trigger a big improvement on investors’ perception of the company. And there were positive news about SMRT which appeared by mid-2014.

The government announced a new model for the public bus industry that might improve SMRT’s profitability. Although the impacts for the company from the change is still not fully known – it’s still unclear how the new model for the public bus industry might really affect SMRT’s business, (though the probability is skewed toward a positive outcome) – that ounce of positivity had been enough to give investors some hope, resulting in a sharp rebound in SMRT’s share price.

Foolish Summary

Psychology plays a big role in investing. As investors in individual companies, we stand to profit if we can understand the market’s expectations with different companies and tell when those expectations differ from a company’s business future.

Read more about investing and get more investing tips and tricks, FREESign up here to The Motley Fool Singapore's weekly investing newsletter, Take Stock Singapore.

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest,better

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.