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.

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Mr. Dow and Mrs. Jones – Welcome to Stock Picking

Well, that was fast. Only two days ago, the S&P Index Committee removed down-trodden General Electric (NYSE: GE) shares from the venerable Dow Jones Industrial Average. Today, shares of its replacement, retail pharmacy company Walgreens Boots Alliance (NYSE:WBA), fell a brisk 10%.

The cause: a very company-specific problem for the new Dow member as Amazon has acquired PillPack, an online company that provides home-delivery of pre-sorted medications. This could make Walgreens the next company to see its profits eroded by the Internet giant. For reference, GE shares were down less than 1%.

Becoming the next ecommerce victim might not have been the effect that the S&P stock-pickers had in mind when they chose Walgreens to “make the index a better measure of the economy and the stock market." Perhaps they should have selected Amazon instead?

Indices like the Dow Jones Industrial Average are seen as representing “the market.” As such, most investors assume they have essentially zero risk from the effects of individual stock prices. But in reality, these indices are baskets of specific stocks – that is what makes up the market. And, when a highly concentrated index like the DJIA holds only 30 stocks, its exposure to any one stock’s fundamentals and valuations, not to mention investor sentiment, can have a meaningful effect.

When the S&P Index Committee makes changes to its portfolio, they are picking stocks. Like many investment committees, they meet on a regular (monthly) to review their holdings based upon a specific methodology1. As stock-pickers ourselves, who spend significant amounts of time researching and valuing individual stocks, we fully appreciate the merits and difficulties of deciding which to buy and which to avoid.

So, when the Dow Jones, or any index, has a rough day, it might just be that a few prominent stocks had company-specific problems. It may not be “the market” after all.

  1. For the S&P Index Committee’s methodology, please visit their website at this link. http://us.spindices.com/documents/methodologies/methodology-sp-us-indices.pdf

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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."