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.

Mutual Funds

Turnaround Mutual Funds: The Few, the Brave & the Potentially Profitable

Excerpted from March 2014 Issue

While we normally focus on individual stocks, from time to time The Turnaround Letter likes to look at mutual funds that focus on turnarounds. Mutual funds can be attractive because a single fund can provide fairly broad diversification. Unfortunately, there are very few mutual funds that really focus on turnaround investing. In fact, out of the thousands of mutual funds out there, we could only find a dozen, all of which are detailed in our contrarian investing newsletter. Even in those funds, turnaround investing is usually not their principal objective: In most cases, it is just one of several strategies that the fund manager pursues.

In some ways the scarcity of turnaround-oriented funds just validates our investment philosophy that turnarounds represent an inefficient--and therefore potentially very profitable--niche in the securities markets. Even professional investors tend to shy away from turnarounds because they require a somewhat different analytical approach from more mainstream stocks.

Another reason why there are very few turnaround mutual funds today is that there is no index of turnarounds. Today, most mutual funds (and the people who sell the funds) want to compare their returns to a certain benchmark, usually a well-known index like the S&P 500. As a result, most fund managers tend to hug their benchmarks fairly closely. These fund managers are risk averse. They want to keep their jobs, after all; and they give up the opportunity to outperform their benchmark in exchange for reducing the risk of underperforming. Since turnaround stocks are underrepresented in the major benchmarks, fund managers are hesitant to buy them. The managers of these mutual funds discussed are brave enough to put at least a portion of their portfolios in turnaround situations, and many of them have posted strong returns over the years because of that.

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Tupperware: Not a Good Fit as a Turnaround Stock

At first glance, the shares have decent appeal as a turnaround investment. Looking deeper, however, the fundamentals are not as strong and stable as they appear. Surplus cash flow is tight, a key driver is weakening, it is increasingly reliant on China and has other nagging issues. We don’t see the new CEO as a catalyst for change. Despite the “first glance appeal”, Tupperware isn’t a good fit as a turnaround stock. Read More.

Comparing Stocks Vs. Bonds

While the common stock of a turnaround candidate usually has the greatest upside potential, other classes of securities, such as bonds or preferred stock, may offer attractive profit possibilities with less risk. Many turnaround companies have only one class of securities available to investors but where there are different classes to choose from, it can pay to do a little extra analysis of the various options.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."