When investors flee from an S&P/ASX 200 Index (ASX: XJO) stock like it's a burning building, it can mean one of two things.
First option is that the business is genuinely in decline. Revenues, earnings, profits, or all three, are falling and it will take something dramatic to turn it around.
The second possibility is the company has encountered one-off adversity that's scared off investors. The underlying business is still fine.
If you can distinguish that a particular ASX 200 share is in the latter category, you could buy them at a nice discount with the expectation that the stock price will head up in the future.
The team at QVG Capital identified precisely two such opportunities in a recent memo to clients:
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When everyone else 'misses the forest for the trees'
Johns Lyng Group Ltd (ASX: JLG), as the second largest holding in the QVG portfolio, caused some stress as it fell 17% last month.
This is despite it announcing an earnings upgrade.
"We think fears around peak earnings for catastrophe repair work 'miss the forest for the trees' and expect the company to continue to grow earnings faster than expectations."
The QVG team admits the decline in the insurance repairer's stock price has been unpleasant.
"The derate in the valuation has been painful with the stock now trading on half of its peak earnings multiple," read the memo.
"During our ownership, however, Johns Lyng Group has delivered 320% EPS growth and we remain highly confident in the earnings outlook from here."
The Elvest Fund analysts agreed earlier this week, revealing they bought more Johns Lyng shares while the price was hammered.
"Johns Lyng Group's growth drivers remain intact, including the strata division in Australia and the Reconstruction Experts (insurance building) division in the US."
Poised for a 'break-out' year
CSL Limited (ASX: CSL) shares continue their years-long struggle, losing 9.5% in June.
The QVG team knows exactly what happened to its third biggest holding.
"The company gave earnings guidance for FY24 which was 14% below forecasts," read the memo.
"Naturally there is a level of conservatism in this guidance given we're a year out from closing FY24 but the key reason for this adjustment is a slower recovery of margin."
The current underperformance just gives it upside in the longer run, as far as QVG analysts are concerned.
"We like that CSL is significantly under-earning relative to its past margins but will have to wait multiple reporting periods to see them demonstrate this earnings power."
In its recent memo to clients, Morgans concurred with QVG's bullishness on CSL.
"We believe CSL is poised to break-out this year, a COVID exit trade, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares offering good value trading around its long-term forward multiple of ~30x."
