When an ASX stock has disappointed investors for years, is it a bargain or a trap?
The answer is that it's impossible to know just by looking at how the share price has plummeted in the recent past.
It's a cliche, but past performance is never an indicator of the future.
The simple fact is that how attractive a stock is depends on its future business prospects. Forget the past.
In fact, a depressed stock price for such a company could merely represent the once-in-a-lifetime chance to buy at a dirt cheap level.
The team at IML smaller companies fund reckons packaging company Pact Group Holdings Ltd (ASX: PGH) is a perfect example of this.
The Pact share price has lost its investors a horrifying 87% over the past five years.
Let's break down why IML analysts rate the ASX share as a buy right now:
Improving balance sheet and on the right side of history
Firstly, the IML team acknowledged in a memo to clients that Pact's latest results were not flattering.
"Pact Group, the leading rigid plastic packaging manufacturer in Australia & New Zealand, fell after reporting that its FY23 results will be negatively impacted by slower demand from retail and agricultural customers, with poor weather in New Zealand partly to blame."
But from here, the potential is on the upside.
"Pact is focused on improving its balance sheet and has a program underway looking at asset sales and cost reductions," read the IML memo.
"We continue to believe Pact's core rigid business remains at the forefront of plastic resin reuse and that the company has a solid outlook."
A tangible testimony to the growth capability of the recycling business was the recent signing of a big-name client.
"This was validated late in the quarter by the signing of Aldi as a reuse customer for its home brands, adding another significant customer to its plastics reuse program."
According to CMC Markets, three out of five analysts that currently cover Pact Group rate the stock as a buy.
The Australian Financial Review reported back in March that the old Credit Suisse (now part of UBS Group AG (SWX: UBSG)) slapped a share price target of $3.70 on Pact Group.
That's a crazy 444% upside from the current level.
The Motley Fool's Tristan Harrison last week named Pact as a potential beneficiary from the rapid rise of the circular economy.
"Statista numbers show the global waste recycling service market was US$55.1 million in size in 2020 and that it could grow to US$88 billion by 2030," he said.
"That's a rise of about 60%."