They Don't All Go Up

...At least not right away. Unfortunately, not every stock we recommend (or buy in our personal accounts) immediately goes up. We thought it was worth sharing our thoughts on what to do when a stock you’ve bought goes down.

There is an old adage among investors that you should “Sell your losers and let your winners run.” We don’t disagree with letting winners run--subject to the caveat in the next paragraph--but we would advise against a knee-jerk sale of any stock that is down. This is especially true in dealing with turnarounds or other deep value situations. Because turnarounds often take longer than you expect, patience is especially important in this type of investing. It is important to have a longer-term view even though most other investors may be focused on short-term results. Few things are more frustrating than selling a stock just before it finally turns the corner and takes off.

The key to making good decisions about underwater stocks (as well as stocks with gains) is to evaluate the future prospects of each stock based on all that you know about the company at this moment in time. Investors must consider their own tolerance levels when it comes to both potential future losses and upside if, indeed, the turnaround is successful.

You need to figure out what is the risk and what is the reward potential in each stock right now. As hard as it may be to do, you should ignore what you paid for the stock. You can’t get the purchase price back--instead you have to figure out where the stock is going from here. (The only time the purchase price is relevant is when you are doing tax planning, at which point you need to think about taxable gains and losses.)

For example, take a stock trading at 10. Investors who bought it at 20 probably think it is a terrible stock to own while investors who paid 6 for it may love it. The key question is “Where is it going from here?” If it is likely to go to 16--a 60% gain from where it is now--you should hold it or even buy more regardless of what you paid for it in the past. Conversely, if the current information suggests that the stock will drop to 8, you probably should sell it.

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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."