With an impressive and completely new turnaround management team in place, this company is redirecting its focus toward paying down its debt, lowering interest costs, streamlining operations and re-investing to help generate new revenue growth. As the market sees the company grow its cash flow and reduce its debt, investors should give the stock a higher multiple. Some patience may be required, but shareholders can take comfort from the fact that their interests are aligned with a buyout sponsor that still holds a 70%+ stake in the company.
The senior living sector has a lot going for it right now. First and foremost are demographic trends, with the number of senior citizens in the U.S. expected to rise dramatically in the coming decades. In addition, the industry remains quite fragmented with many senior living units run by small local operators. This means that public companies in the sector can continue to grow by acquisition, and eventually even these public companies may become acquisition targets for larger industry consolidators. Yet in spite of these favorable factors, most of the more focused senior living stocks have performed relatively poorly over the last year and half or so--creating a promising contrarian investing opportunity.
When investors think about turnarounds, they usually think about manufacturing, retail or service companies. One additional type of company that often is ignored is the real estate investment trust, or REIT. With REIT turnarounds, the mantra is “management, management, management.” That's because these often involve selling illiquid real estate, which can take considerable time. For patient investors, however, REIT turnarounds can offer substantial gains while often paying attractive dividends in the meantime.
For what seems like the umpteenth time over the last several years, investors – in both stocks and bonds – are once again focused on the questions of “Will the Fed raise interest rates? When? And by how much?” The stock and bond markets often react quite sharply to whatever the “expert” view is on any given day.
The best environment for turnaround stocks is when the economy is just beginning to improve after a slowdown. As broad economic conditions improve, the weakness of turnaround companies can become their strength as they benefit much more than healthier companies. Their sharper recovery can lead to outsized share price gains relative to other stocks.
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George reminds value investors: "Fortunately, many of the factors...just aren't present in the market, and the other reason that investors seem to be down on the banks is they sort of expected the Fed to raise interest rates a little faster than they have. And the banks do better when interest rates are rising because they have wider margins on their loans, but I think the Fed will gradually raise rates to we will see profits improve, and so I think this downturn is really temporary."