This month's purchase recommendation is a company that has grown by acquisitions that have then not been integrated well. The shares have declined sharply in the past three years. With several new board members (including one backed by an activist) and new company leadership, the company is starting to unlock the substantial value trapped in its asset base and improve its operating margins. With the company’s high debt level, its shares are not without risk. However, the catalysts plus a favorable secular tailwind give the shares more than enough upside to offset the risks.
Last month we highlighted several turnarounds in Europe and Asia. This month we look north to our friendly neighbors in Canada. While its public equity market as measured by the respected Toronto Stock Exchange (total market capitalization of about $2.2 trillion and 1,500 listed companies) is considerably smaller than that of the United States, fascinating turnaround opportunities can be found there.
While the market remains exuberant over some of the newest companies, including Netflix (21 years old), Square (9 years old), and Google (20 years old on September 4), it’s difficult to say if they will be around in another 10 or 20 years. After all, previously hot new companies like Blockbuster, AOL and privately-owned MySpace all vanished after relatively short lives. Some companies, however, have stood the test of time.
At best, the broad stock market’s 15.8% drop since its peak only three months ago on September 20 has been disconcerting. The deeper 23% plunge in small cap stocks, as measured by the Russell 2000 index: startling. For the weakest 9% of S&P500 stocks – often those with some type of unfavorable macro exposure – their average loss of 40% in such a brief time has been simply jaw-dropping.
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.
This Forbeswrite-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."