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

Index Funds and ETF’s Create Volatility but also Enhance the Opportunity in Turnaround Stocks

June 25, 2012

Index funds and index-based ETF’s have become increasingly popular, primarily because of their ease of purchase and low management fees. While these products are definitely useful for many investment applications, they may be responsible for some of the increased volatility that we have been seeing in the stock market. But at the same time, they may improve the profit opportunities for fundamentally oriented investors, particularly turnaround investors. 

These index-based products make it very easy for investors to move quickly in and out of the market as a whole or in and out of certain sectors or asset classes. Because of this ease of entry and exit, many investors such as hedge funds are using index ETF’s to try to time the market--a very poor use of these products in our opinion.

Whenever there are net purchases or sales of an index fund, the fund must buy or sell (as the case may) the underlying securities. As the movements in and out of these funds become more rapid, the funds’ large scale purchases and sales of the underlying securities can lead to more volatility in the markets. The effect of index fund trading may have only a modest influence in market sectors dominated by actively traded stocks with large market capitalizations, such as the S&P 500 stocks. But in other, less liquid sectors, the effect can be more profound. For example, trading in ETF’s in the small cap stock and high yield bond sectors has increased significantly over the last year or so. In these sectors, where there is normally less activity in the underlying securities, the transactions from the ETF’s can move prices quite sharply.

The good news from the increasing use of index products is that it creates more inefficiencies in stocks and other securities that either aren’t in the index or represent a very small percentage of the index. And inefficiency--in an otherwise pretty efficient market--often leads to superior gain potential. Turnaround stocks often fall in this category. Many turnaround stocks have been dropped from their previous index when the stock fell in price. This adds to the inefficiency--and profit potential--in turnaround stocks. 

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Energy's Wild Ride--Energy Sector Bankruptcies E-Report

BankruptcyData's Energy Sector Bankruptcies report anticipates that overall Chapter 11 activity will remain at a high level for the foreseeable future. Energy company filings have probably peaked and will gradually decline over the next 12 to 18 months, so the flow of bankruptcies will likely shift toward a more diverse group of industries. In time, this could contribute to an opportunity-rich market for distressed debt and post-reorganization stocks. Read More.

Market-Beating Profit: The 200+ Club

Turnaround stocks present a unique opportunity for savvy investors to buy in at bargain prices. Take a look at this list of just a few of our purchase recommendations that have realized a return rate of 200% or better:

200+ Club: Value Investing Stock Profits with 200% or Better Return

* Bristow remains in our active portfolio (currently as a Hold), and 2,849% gain is as of 1/17/17.

Five Struggling Stocks That Will Turn Around

 

stock market advicex

 

Kiplinger points out that despite the post-election stock market surge, not all stocks have benefited from the uptick: "More than 100 issues in the S&P 500 have fallen in price this year, including dozens that have slumped by more than 10%....Yet these stocks won’t all stay in the dumps forever. Some will mount a comeback in 2017, making it an opportune time to try to identify the best candidates."

 

Quoting George Putnam, Kiplinger details five value opportunities for the new year.

 

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