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.

Bankruptcy/Chapter 11 / Bonds

What is Distressed Securities Investing?

The Turnaround Letter is launching a new series on investing in distressed securities. In this first note, we delve into the question of “what is distressed securities investing”?

Investing in distressed securities means purchasing the equity and fixed income securities of companies that are either in bankruptcy or have a meaningful likelihood of filing for bankruptcy in the near future. These companies have claims against them that are greater than the value of their assets. More concretely, distressed companies don’t have the cash flow to service their debts.

Critical to the definition of “distressed”: these companies are fighting the clock – if operating results don’t improve soon or if their debts are not renegotiated, a bankruptcy will likely result. Their survival, in essence, is on the line.

How is this different from “turnaround investing”? Generally, investors in distressed securities want a turnaround – that is, they want the company to become operationally and financially stronger which will drive up the value of the (formerly) distressed equities and bonds. When we at The Turnaround Letter think about “turnarounds” we think about companies that are not fighting the clock. Rather, turnaround companies in our view have the financial staying power to provide them the time to make major improvements to their operations.

Distressed investing usually involves greater risk than turnaround investing, but can also offer higher returns. Given the risk, most investors in distressed securities focus on bonds. These securities can provide greater downside protection than equities, as they may have legal claims on valuable assets and may receive new securities or cash in a bankruptcy reorganization. Yet they still can provide significant upside potential, as gains of 100 to 200% are not uncommon. Distressed equities could potentially provide returns measured in multiples, yet if the company restructures or files for bankruptcy the equity generally becomes worthless.

In future notes in this series, we will explore what provides the attractive opportunities in distressed securities, how to find them and what to do when you find a distressed investing security that looks appealing.

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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."