Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Automobiles & Components / Post-Bankruptcy Stocks

How Will the Recall Issue Affect GM Stock?

Because General Motors is currently the subject of many negative headlines arising from a significant recall relating to ignition switches, we wondered what long-term effect the recall would have on GM’s stock. Our best guess is “very little.”

As contrarian investors, we like to “buy on bad news.” We’ve looked at a number of product liability issues over the years, going back as far as the exploding gas tanks on Ford Pintos in the 1970’s. Our general conclusion is that once the negative headlines subside, even major product liability issues have little long-term effect on stock price. The one major exception has been for asbestos-related liabilities, which usually have a devastating effect on the company’s common stock.

We decided to test that conclusion with a relatively recent example. In late 2009 and early 2010 Toyota issued a series of recalls relating to sticking accelerator pedals. Just this past week, Toyota agreed to pay a $1.2 billion fine to the U.S. government arising from the accelerator issue--and that is on top of a $1.1 billion class action settlement with private litigants late last year.

So what happened to the Toyota stock? From the end of February 2010 (which is the month after the recalls peaked) to March 25, 2014, Toyota stock has gained 45%. This compares to a gain of 31% for Ford stock and virtually no gain for Honda stock over the same period. 

Obviously, many factors affect a stock’s long-term performance, but our conclusion is that liability relating to recalls or other product defect issues usually isn’t one of them. As a result, we think the recent dip in the price of GM stock could be a buying opportunity.

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A Closer Look At Two Activist Campaigns

Watch to see if ADP’s CEO Carlos Rodriguez inadvertently helps Pershing, and his aggressive and sometimes personal stance against Ackman could backfire. Overall, because of the stock’s strong returns and Ackman’s weak credibility, we would give this activist campaign a low chance of making ADP a successful turnaround investment. For turnaround investors, the Trian campaign appears to have a win-win opportunity for investors--either Peltz joins the board and learns enough to re-invigorate P&G, or loses and management must either execute (boosting earnings and the shares) or they will face a more drastic proxy campaign with higher odds of success down the road. We think the P&G campaign could turn out well for shareholders.  Read More.

Warrants: A Solid Investment Opportunity

Warrants provide a valuable tool for the savvy investor. When selected and implemented well, they can be a smart addition to a diversified investor’s portfolio. Like options, warrants are not equity. They only convey the right to buy equity. As such, neither holder is entitled to dividend rights, pre-emptive rights, proxy voting or any share of any liquidation.

 

Value Investing

 

Warrants' return potential can be very high, but they also carry significant risks. Learn what they are, how they work, strategies to minimize risk and find profit with warrants.

Here's Why You Should Invest in Asset Managers

 

stock market advicex

 

This Forbes article cites a recent MoneyShow write-up that recommends investors take advantage of the strong stock market and potential interest rate hike by "putting some of your investment assets into the shares of asset management stocks."

 

The article praises The Turnaround Letter's OAK purchase recommendation and quotes George Putnam: "As the corporate debt binge that we’ve experienced since 2009 comes to an end, Oaktree will benefit from a growing number of restructurings and bankruptcies."  

 

Learn more about Putnam's investing success with turnaround stocks.