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George Putnam, one of the country's leading turnaround and distressed investing professionals, answers your investing questions. This is your chance to find out everything you wanted to know--but were afraid to ask--about turnaround investing.

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With all the hoopla over Facebook, what do you recommend that individual investors do?

May 24, 2012

I normally don’t like to discuss particular stocks in the Ask George section, but I’m going to make an exception with Facebook because it is instructive on two fronts: 1) because of all the hype and 2) because it says something about IPO’s in general.

With all the hype about Facebook, I think there is a very good chance that the stock is significantly overvalued—even after falling about 20% from the IPO price. The stock currently trades at about 22 times revenues and 76 times trailing earnings. In other words, the company has to grow phenomenally to justify its current valuation. While it is possible for Facebook to achieve the necessary growth in revenues and profits, that seems unlikely to me. The company would have to do just about everything right for quite a long time.

This brings me to IPO’s in general. My personal view is that they are often a “rigged game” designed to benefit the investment banks and some of their institutional investor friends. There is substantial academic research showing that the majority of IPO’s do not perform well for several years after the initial price surge following the offering. (And Facebook didn’t even make it beyond the first day before fading.)

I much prefer to focus on seasoned companies with established track-records and cheap valuations.  In the upcoming (June 2012) issue, the Turnaround Letter will look at some interesting stocks trading well below their IPO price. Also, in contrast to Facebook, we will examine a household name technology company trading at a fraction of sales and a very low multiple of earnings.

(Question submitted by K. Moore)

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2015 Bankruptcy Recap: 46% Increase Fueled by Oil & Gas/Mining Industry--Further Uptick Predicted

Looking back at 2015, research reveals a 14% decline in overall business bankruptcies but a 46% uptick in public company Chapter 11 filings—with a striking 51% of those filings coming from the battered Oil & Gas/Mining sectors. Economic indicators point to further increases in corporate bankruptcy, in general, and Energy-related filings, in particular. Just a few days into 2016, this viewpoint has already been validated by Arch Coal's long-awaited $8 billion Chapter 11 filing—and continuing oil price plummets severe enough that OPEC will likely convene an emergency meeting to address "shattered" economies. Read More.

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Spotlight: Junk Bond Market

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MarketWatch's Mark Hulbert recently tapped George's distressed investing expertise to determine the fate of the junk-bond market and what its nearly three-year decline likely means for your portfolio.

 

Hulbert writes, "What’s really going on? For insight, I turned to George Putnam, an expert in distressed-company investing. His Turnaround Letter advisory service has handily beaten the stock market over the past 15 years, according to the Hulbert Financial Digest’s tracking, by an impressive margin of 7.3 percentage points a year on an annualized basis."

 

Commenting on the rapid growth of high-yield exchange traded funds (ETF's), Putnam notes, "They have become the investment vehicle of choice for short-term investors….Those investors tend to be trend followers and, therefore, are just the opposite of being contrarian."

 

Read the full MarketWatch junk-bond article to find out what George thinks these recent indicators likely mean for future distressed investing profit.