Our friends at the Beard Group are hosting the 26th Annual Distressed Investing Conference on Mon., Dec. 2, 2019, at The Harmonie Club in Midtown Manhattan.
History can teach investors how to interpret media commentary on stocks
Here at New Generation Research, home of The Turnaround Letter, we are big fans of history. Not only do we find history fascinating in its own right, we have also learned that by understanding what has happened in the past we can better understand our current environment. And, perhaps more importantly, we can improve our ability to recognize and evaluate what might happen in the future. The famous quote, attributed to Mark Twain, that “history doesn’t repeat itself but it often rhymes,” captures this idea well.
Michael Jensen’s 1989 article in Harvard Business Review, “The Eclipse of the Public Corporation, was a ground-breaking view of private equity.
While historical returns have been very strong, they are diminishing and may be even lower in the future.
Private equity will continue to play a major role as a form of company ownership but won’t eclipse public ownership anytime soon.
In 1989, Harvard Business School professor Michael Jensen wrote a ground-breaking article titled “The Eclipse of the Public Corporation1”. In the article, he put forth his belief that a new form of corporate organization, the “LBO Association” (in essence, private equity) would eventually become the dominant form of company ownership. He cited several advantages of private companies, most notably the major reduction in the agency problem, “the conflict between owners and managers over the control and use of corporate resources.” He added that private equity brings greater operational efficiency, tighter strategic focus and better capital allocation.
In July, 1986, almost exactly 33 years ago, George Putnam sent the first Turnaround Letter to subscribers. It looked like this (click here to download a copy):
Recently I was asked how my investing perspective changed over the 32 years of publishing The Turnaround Letter. It's a fascinating question because change is constant, and often beneficial (although that's not a given) in the business world. If change is the norm, can investing principles stay constant? I firmly believe that they can.
Investors know that it’s always easier to sell a stock when it is going up--the more people who want to buy your stock, the better the price. I also strongly believe that it never pays to be greedy when it comes to the stock market. There is an old Wall Street saying, “Bulls make money; bears make money but pigs get slaughtered.”
Turnaround investors must be especially wary of trendy sectors. Recently, this has been demonstrated by the dramatic implosion of several “green” energy companies, including wind and solar energy providers. We’ve seen dramatic falls from grace many times before. A few stocks, or a whole sector, catch the public’s fancy. Share prices skyrocket…only to come crashing back to earth a few months or quarters later. Solar power is simply the latest in a long list of fashionable sectors—after telecom, Internet and theme-based dining, to name just a few.
There is an old saying in the investment business: “You can always tell the market-timers: they’re the ones with the holes in their shoes.” While there may be cycles in the stock market, The Turnaround Letter doesn’t know anyone who can successfully time those cycles, so our stock market advice for turnaround investors is not to attempt market timing.
Convertible bonds are an attractive vehicle for investors who want equity-like returns but cannot bear the volatility of stocks. A convertible may also provide more current income than the underlying stock. A convertible bond is a bond that can be exchanged for stock at a certain price ratio. As a bond or a debt obligation of the company, the convertible pays you interest periodically and then pays you back your principal at maturity even if the stock declines in price. It also gets paid off ahead of the stock if the company files for bankruptcy. These bond-like characteristics usually keep the convertible from falling too far if the company has poor results.