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

Free Report: Turnaround Investing Mistakes

Turnaround Investing Blog

Turnaround Investing Blog

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."