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.


Mid-Year Stock Market Update

Excerpted from the July 2015 Issue

So far in 2015 the large-cap portion of the U.S. stock market has traded in a relatively narrow--and rather symmetrical--band. The widely followed S&P 500 Index was up only about 0.2% for the first half of the year, with a high for the year of +3.7% and a low of –3.8%. These returns are without dividends, which would add about 1.0% to the S&P returns. Incidentally, all of these calculations also pre-date the most recent Greek debt-related fallout and NYSE trading disruptions on July 8th.

According to a market analysis group cited in Barron’s, that is the narrowest first half trading range in the history of the Index. Moreover, there have only been three years--1952, 1993 and 2004--during which the Index had not been up or down by at least five percent at some point in the first six months.

As is often the case, the market sectors that were laggards last year have outperformed this year. Small-cap U.S. stocks, as measured by the Russell 2000 Index, lagged the S&P 500 last year by more than eight percentage points, but this year the small-caps are beating the S&P by about four percent. Similarly, foreign stocks, as measured by the MSCI EAFE Index, which were down 6.3% last year, are up about 3.8% so far in 2015. Emerging market stocks have been about flat for the year so far. 

On the whole, the bond market has been soft over the first half of the year as investors wait for the Federal Reserve to raise interest rates. The Barclays U.S. Aggregate Index, which measures a mix of government and corporate bonds, is down 0.1% for the year to date. High yield bonds have fared better than we expected so far, gaining 2.5% as measured by the BofA Merrill Lynch High Yield Index. It is worth noting, however, that in 2014 high yield bonds had a good first half but gave back most of their gains in the second half.

So, where do we go from here? In the January issue, we predicted that the S&P 500 would gain four percent for the full year (read the full article free of charge here); and we don’t see any reason to change that forecast now. While the stock market is likely to remain uninspiring for the rest of the year, to us it still looks like the best game in town. High quality bonds could be volatile when the Fed finally does raise rates.

As discussed in the most recent issue of The Turnaround Letter, we expect to see more defaults in the high yield bond universe, which is likely to hurt returns in that asset class. The stock market’s narrow trading band may have sapped the enthusiasm from some investors, but given the lack of alternative places to invest right now, we think there will be enough demand to push stocks a little higher from here. In addition, we expect the economy and corporate earnings to remain relatively strong for the next several quarters. 

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IBM: Not Yet Time to Swing at this Pitch

IBM’s stock underperformance since IBM’s current CEO took the helm in 2012 has been stark, with the shares declining 23% while the S&P500 Index has more than doubled. One big problem: revenue growth rate is zero, at best. Without revenue growth, what’s left to entice investors? The real driver of value at IBM – free cash flow that is used to repurchase shares. Can IBM borrow its way to shareholder prosperity as its cash flows shrink? What to do with IBM shares? Wait for a better pitch in the form of a catalyst or much lower valuation. 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."