Despite this large cap stock pick’s problems, its brand and core franchise remain strong: The restructuring efforts are beginning to show promising results although the pace remains slow. Costs are coming down, the company is seeing better net inflows, overall management is tighter and capital raises have bolstered the balance sheet. While the shares carry significant risks due to the leveraged nature of operations and its sensitivity to the capital markets, we see considerable upside potential if the turnaround is successful.
We thought we’d take a stroll through the small cap world to see if the market is missing anything. Our focus was to find stocks that have weak recent performance but attractive valuations, where the company has reasonably stable operations and there is some catalyst or other driver to push the stocks higher. We limited our search to companies with market caps below $1 billion and emphasized two of our favorite hunting grounds for value: the consumer and industrial sectors. Many potential candidates deserve their cheapness because of highly vulnerable business models, but we did find a few others that looked like potential winners.
Because of special tax law provisions that exempt the territory’s debt from not only federal taxes but also state taxes in every state, the bonds are widely held by investors across the country. Since the legal action is under a new law that has never been tested, there is tremendous uncertainty about how much creditors will recover and how long the process will take, but there may be opportunities for stock investors to profit from the island’s restructuring as well--perhaps with less downside risk than in many of the bonds. We found four public companies based in Puerto Rico that could benefit from stabilization in the island’s finances as well as three major insurance companies with exposure to Puerto Rican debt.
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.
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.
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
This Forbesarticle 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."