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.

Don't Make Too Much of Price History

At The Turnaround Letter, we believe that the essence of turnaround investing is profiting from a substantial upturn in an underperforming company’s fundamentals. Simply put, it’s buying when things look bad but are actually about to get a lot better.

What is the most powerful factor in successful turnaround investing? Making sure there is a solid and clear reason that the fundamentals – revenues, costs, balance sheet – will improve. What is the most important way to reduce risk when selecting a turnaround stock? Buying at a significant discount in underlying value. In other words, buying with a margin of safety.

Most of the mistakes in turnaround investing violate one or both of these principles. If fundamentals don’t improve (or worse, deteriorate further), the investment will almost certainly not be successful. If the valuation is not attractive, the over-paying investor not only has reduced their upside potential, but also risks greater downside should the fundamentals stall out.

It can be tempting to look at a depressed stock and think, “it used to trade at 40 and now it’s at 8 – therefore it must be a bargain.” Unfortunately, the fact that a stock once traded at a higher price does not guarantee that it will ever get back there. One big reason that a stock trades so much lower than before: its earnings potential or assets have deteriorated. Without some fundamental improvement, the share price will continue to lag, or worse.

You want to understand why the stock price has declined. Then identify what fundamental change will reverse the company’s fortunes. Is the management taking new actions to address the issues? Is the industry cycle turning up? Is something else improving?  Only then can the stock have a chance to recover. And remember, the former $40 stock doesn’t need to fully recover. If you buy it at 8 and it goes to 16, even though it’s down 60% from its prior price, you still have a 100% gain.

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Identify & Profit from Distressed Investing

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Amazon = US GDP 1970

Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached. Read More.

EV/EBITDA: What Is It & Why Are We Using It More?

In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

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."