What did The Turnaround Letter see in these companies that other did not?
The four companies below achieved fantastic returns for The Turnaround Letter subscribers but what did George see in these companies that others did not? The answer lies in two key components of turnaround investing: being able to separate those companies that will recover and return to favor from those that won’t and not being afraid of turnaround situations. Of course, George does not always get it right, and The Turnaround Letter has had its share of losers over the years; but these four companies are indicative of some of the things that George looks for that other analysts often miss.
Flextronics
Recommended in January of 2009 and closed out in January 2011 with a 247% return.
George saw how Flextronics was positioned nicely within its industry. It had an “A” list of customers and a strong enough balance sheet to make it a survivor almost regardless of how long and severe the economic slowdown that we were in at the time lasted. It had the number one or number two position in just about all of its principal markets and the global reach that allowed Flextronics to provide high quality service at a very competitive cost. Realizing the stock had dropped 80% since the beginning of 2008 George saw this as a great opportunity to buy in.
In January of 2011 George recommended selling Flextronics at $7.87 a share. He felt it was time, after a nice run, as Flextronics is dependant on continued growth in a notoriously volatile tech sector.
Teradyne, Inc.
Recommended in December of 2008 and closed out in February 2011 with a 328% return.
Investors reacted ferociously to the 2008 slowdown in worldwide semiconductor production which drove the Teradyne’s stock price down to below $4/share. Realizing that semiconductors are key building blocks for most electronic products and that the industry tends to go through wide cyclical swings, George felt purchasing a semiconductor testing company like Teradyne could be a safe way to profit from the next upturn in the semi-conductor market. Testing is a key element of semi conductor production so the testing equipment producers will certainly prosper with a market turnaround. With a strong management team and a strong balance sheet with little or no debt, Teradyne had all the makings of a turnaround candidate.
In February 2011 George recommended selling Teradyne stock at $16.23 after a very nice run.
On Assignment
Recommended in January of 2004 and closed out in August 2011 with a 99% return
On Assignment, a healthcare and laboratory sciences staffing provider, had a nice run from 1992-2000 when stock prices hit a high of almost $35 but a faltering economy and difficulty absorbing a 2002 acquisition drove the stock price down to around $5 in late 2004. George recognized that On Assignment had developed into a leading player in an otherwise fragmented industry and this combined with favorable long-term industry fundamentals virtually assured the demand for their services would continue to rise in the foreseeable future. Throw in the fact that the company had a very solid balance sheet with a current ratio of five to one and $35 million in cash and you have all the makings of a nice turnaround situation.
In August of 2011 George recommended selling the stock at $10.24 per share because he was concerned about the possibility of Washington aggressively going after Medicare, Medicaid and other healthcare expenditures.
Williams Company
Recommended in June of 2010 and closed out in March of 2011 with a 92% return
Williams Company is a major, integrated natural gas company that produces, gathers, processes and transports natural gas throughout the U.S. The company’s debt burden from years of expansion brought them close to bankruptcy in 2002 and drove the stock down below $10 from above $40 just six months earlier. George recognized the temporary imbalance of natural gas supply and demand and felt Williams would be nicely positioned in the industry as the drop in prices had driven some of the weaker players out of the market. Additionally, on the demand side, natural gas is viewed as the preferred energy source for the future because of its lower environmental impact and domestic availability. George felt that Williams not only had the financial strength to withstand the current downturn but to grow and prosper when the natural gas prices started creeping up.
In March of 2011, George recommended selling Williams company at $30.36 a share as the company announced plans to split into two parts.
Turnaround Tips
TLCorner
Where Are the Customers' Yachts?
This headline could easily apply to Goldman Sachs today, as recently described by former employee Greg Smith. Actually, it is the title of a book written in 1940 by a former Wall Street employee named Fred Schwed, Jr. The title refers to a story about person admiring the yachts owned by bankers and brokers who asks where the customers' yachts were. Of course, the customers, who had dutifully followed the advice of the bankers and brokers, couldn’t afford yachts. This just goes to show that there is nothing new about the attitude that Goldman Sachs employees were purported (probably accurately) to have about their clients. It was just as true in 1940--and likely has been forever--as it is now.
Read More.Beware of Trendy Turnaround Candidates - Even Green Ones
Don't Chase the Headlines
The recent unfortunate accident involving the Costa Concordia cruise ship, which is owned by a subsidiary of Carnival Corp., raises an important investing question: Should you bail out of a stock if the company is affected by a serious negative event? Unless the event could be part of a series or trend, the answer is usually “no,” for two reasons.
Read More.What did The Turnaround Letter see that others did not?
Questions & Tips
AskGeorge
Now that Greece's latest bailout is complete, is it safe to buy European stocks again?
We’re not at all sure that either Greece’s or Europe’s troubles are truly behind them. But that said, we also believe that it makes sense to have some European exposure in your portfolio. The advice we gave in the November 2011 issue still holds...
Read More.With so much turmoil and uncertainty in the U.S. economy, and even more fear of collapse overseas, do you ever recommend just getting out of the stock market all together and hunkering down with something safer like bonds?
I never recommend getting out of the stock market entirely--or even making major changes to your allocation to stocks. The stock market is so unpredictable that if you bail out, the risk is very high that you will miss a significant upturn. Moreover, even if you make the right call to get out of the market, you then have to muster the courage to get back in.
Read More.What is your opinion on investing in foreign turnaround companies?
There are certainly good opportunities in foreign turnarounds, but also very significant risks as well. The market inefficiencies that provide unusually high return potential for turnarounds here in the U.S. are probably even greater in foreign markets. However, there may be special, local features that affect foreign companies that we may not understand when we view them from afar.
Read More.Bankruptcy Investing
George reflects on bankruptcy investing activity & trends seen in 2010. Read more.