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Do Great Companies Recover From Great Stock Price Declines?

I had dinner with a really close friend a while back. He works in a bank and is very interested about investing and finance. During the course of our dinner, he asked an interesting question: Do companies with good businesses really see their shares recover after huge market declines?

I thought it’s a great time to revisit this question for the sake of readers here, given our current market conditions.

The Straits Times Index (SGX: ^STI), at its current level of 2,566 points (as of the time of writing at 4:24 pm), is down by 28% from a recent high of 3,550 that was reached on April 2015. With this big double-digit percentage decline seen in the index, it is likely that many individual stocks have fallen hard as well. It may lead some investors to wonder if their investments made prior to this bear market will ever return to former glories.

When my friend asked me the question, I answered, “Of course they do!” But, I only managed to rattle off one or two names before the conversation soon steered away to something else.

So, let me now give a few good examples of companies that got smashed during the Great Financial Crisis of 2007-09 but which then subsequently recovered as a result of solid business growth.

My examples are Raffles Medical Group Ltd (SGX: R01), Dairy Farm International Holdings Ltd (SGX: D01), Riverstone Holdings Limited (SGX: AP4), Straco Corporation Ltd  (SGX: S85), and Vicom Limited (SGX: V01).

In the table below, you can see how much those five stocks had lost during the crisis and how much they’ve gained since:

Raffles Medical, Dairy Farm, Riverstone, Straco, Vicom, share price tables
Source: S&P Capital IQ; author’s calculations (click table for larger image)

All five had suffered big declines. But all of them are now higher than at their highest points, during that difficult episode. As for evidence of their solid business growth, check out the table below, which plots the growth in their earnings per share (EPS) since 2005:

Earnings per share (EPS) growth for Raffles Medical, Dairy Farm, Riverstone, Straco and Vicom since 2006
Source: S&P Capital IQ (click chart for larger image)

In his 1993 book Beating the Street, investing legend Peter Lynch wrote (emphases mine):

“Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock.

The disparity is the key to making money; it pays to be patient, and to own successful companies.”

If you had made, at reasonable prices, investments in companies with great businesses that can stand the test of time and churn out materially higher profits and cash flows years from now, then the odds of your stocks eventually recovering if they’re currently down are solidly in your favour. Keep this in mind if you’re feeling stressed over the current market malaise.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group, Dairy Farm International Holdings, Riverstone, Straco, and Vicom.