These three growth stocks fell up to 30% before recovering. What can you learn?

The prices of many stocks do not return to the level from which they started to fall for months or even years. However, some stocks do recover quickly, returning to the levels from where they started to fall and maybe even exceeding those if the company is fundamentally strong.

In the ever-shifting landscape of stock markets, identifying growth stocks that have experienced a notable dip can be a savvy investment move. In this pursuit, it’s easy to overlook the gems that have recently corrected by as much as 30%, only to rebound impressively.

Today, we’ll highlight three remarkable growth stocks that have seen significant declines but have bounced back sharply owing to their strong fundamentals. By examining these stocks, we’ll explain why they are worth your attention and why buying the dip may have been an opportunity too good to miss.

Whether you're a seasoned investor or just starting to navigate the stock market, understanding these kinds of stocks could be key to adding the next big winner to your investment portfolio.

#1 Polycab Ltd

Polycab is India’s leading manufacturer of cables and wires and allied products such as unplasticised polyvinyl chloride (uPVC) conduits and lugs and glands. It recently launched a wide range of consumer electrical products such as fans, switches, switchgears, LED lights and luminaries, solar inverters, and pumps.

Polycab has a 22-24% share of the domestic organised wires and cables market. It derives 89% of its revenue from wires and cables, 9% from fast-moving electrical goods, and the remaining 2% from other businesses.

It earns 90% of its revenue from the domestic market and 10% from exports, having expanded its global footprint to more than 76 countries. Of its exports, 46% are to North America and 20% to Europe.

The company has a strong presence in India, with more than 4,300 distributors, more than 205,000 retail outlets, 23 warehouses and depots, four regional offices, nine local offices, and 17 experience centres.

Polycab reported 27.9% growth in revenue in FY24 and Ebitda growth of 34.5%. Ebitda margins also improved from 13.1% in FY23 to 13.8% in FY24. For FY26, the company has guided for sales of ₹20,000 crore through its ‘Project Leap’.

In January 2024 the income tax department detected unaccounted cash sales worth about ₹1,000 crore after raiding the company, causing the stock to crack more than 25%, from ₹5,346 to ₹3,878. However, the company did not receive any written communication from the income tax department regarding fines and the stock price jumped back up above the levels from which it had started the fall.

#2 Infosys Ltd

India’s second-largest information technology company, Infosys provides consulting, technology, outsourcing and next-generation digital services to help clients to execute strategies for their digital transformation.

The company’s digital services are rated among the best in the industry. Infosys derives 57% of its revenue from digital services and the balance 43% from traditional services. The key business verticals for Infosys are the same as those of Tata Consultancy Services (TCS), barring life sciences and healthcare. Infosys instead has an energy, utilities and resources division.

It caters to 185 of the Fortune 500 companies. Its clients include ICICI Bank, Daimler Mercedes-Benz, HSBC Bank, Goldman Sachs, J&J, Accenture, Lockheed Martin, IBM Corporation and Deutsche Bank.

Infosys reported 3.6% growth in revenue in Q1FY25 due to slow decision-making among clients leading to slower ramp-up of project execution.

In the fast-moving world of artificial intelligence, the importance of traditional software services firms is equally important as they will be the ones integrating companies’ software with the new AI technology. Infosys is set to play an important role in this.

For FY25 the company has guided for 1-3% revenue growth in constant currency terms. It expects growth in financial services and telecom to accelerate due to large deal wins. Infosys also has a positive outlook on the European markets.

From February 2024 to June 2024, Infosys stock fell almost 20% due to subdued financial performance and an uncertain business outlook. The company also revised its growth guidance downward as project executions were delayed on the back of an uncertain economic environment.

However, the company’s operating performance improved from June 2024 onwards and the business outlook for the entire industry showed signs of promise. This was reflected in the stock price.

#3 Deepak Fertilisers & Petrochemicals Corp Ltd

Incorporated in 1979, Deepak Fertilisers and Petrochemicals Corporation Ltd is in the business of fertilisers, agricultural services, bulk chemicals, mining chemicals and real estate.

It has manufacturing plants in Taloja, Dahej, Srikakulam and Panipat, with an installed capacity of 1.3 mtpa for industrial chemicals, 0.5 mtpa for technical ammonium nitrate and 1.2 mtpa for crop nutrition.

The company derives 59% of its revenue from chemicals, 40% from fertilisers, and the balance 1% from the realty and windmills segment. Deepak Fertilisers is also investing in cloud computing, process automation, mobile apps, unified communication and collaboration tools.

The company recently signed an agreement with Israel based Haifa group, a multinational corporation that supplies specialty plant nutrients for agricultural innovation.

Deepak Fertilisers also announced the signing of a 15-year supply agreement for liquified natural gas (LNG) with Norwegian energy giant Equinor. As part of the agreement, the company will make annual supplies of up to 0.65 m tonnes over 15 years starting from 2026.

Deepak Fertilisers reported degrowth of 23.2% in its consolidated revenues and 40.6% in Ebitda for FY24. Ebitda margins deteriorated significantly to 14.8% from 19.2% the previous year.

Shares of Deepak Fertilisers corrected as much as 35% from its high of ₹705 in December 2023 to a low of ₹460 in March 2024 owing to adverse business conditions and unprecedented dumping of chemicals and fertilisers from China.

However, the situation improved after March 2024 and the company started reporting better operating performance with improved margins.

The stock price reclaimed ₹700 and is currently quoting at ₹1,025.

Conclusion

As they say, good times and good prices never come together. The stock market tends to discount future good and bad times well in advance.

It is important that investors take advantage of situations in which stock prices drop without much change in the fundamentals of the business.

In conclusion, the world of growth stocks offers both exhilarating opportunities and potential pitfalls, particularly when market uncertainty causes substantial dips.

While it’s natural to look back and rue missed opportunities, it’s essential to focus on the lessons learned from these situations.

Recognising the signs of a strong recovery and understanding the factors behind these declines can better equip you for future investment decisions.

But beware: many companies that nosedive on certain news, or changes in the industry outlook or business environment, do not return to their original prices. Examples include Yes bank Ltd, DHFL Ltd, Reliance Power Ltd, and Unitech Ltd.

Remember to do your research before diving in.

Happy investing!

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com