Over the past few months, we’ve seen an increase in the number of companies outside the United States that have shown up on our screens as undergoing meaningful change. We also thought it was interesting to look outside the U.S. because international markets (measured by the MSCI EAFE index) have underperformed U.S. stocks (measured by the S&P 500 index) so far this year.
Only two days after joining the Dow Jones Industrial Average, Walgreens Boots Alliance fell 10%, as Amazon is entering the pharmacy business with its PillPack acquisition. This might not have been the effect that the S&P Index Committee had in mind when it chose Walgreens to better measure the economy and the stock market. Indices are seen as representing “the market” but they are baskets of individual stocks with all the risks these stocks bring.
We are raising our price target (Buy limit) on shares of shoe company Crocs, Inc. (NASDAQ: CROX) to 22 from our previous target of 18. The management team’s turnaround strategy is working well, as revenues are growing and profit margins are expanding even as the balance sheet improves. While higher than our initial price multiple, the valuation remains attractive, particularly with the steadily improving fundamentals.
We continue to rate CROX shares a BUY and increase our Buy limit to 22.
Shoe retailer DSW (NYSE: DSW) reported 1Q18 results that indicate that it continues to make progress with its turnaround. The 5.6% share price decline following the earnings release likely reflected too-optimistic expectations. We reiterate our Buy rating with a $33 price target.
The stocks discussed in this article have all fallen 70% or more from their five-year highs, and they all have one or more catalysts, while also having enough financial runway to allow a recovery to unfold.
Department store retailer Macy’s (NYSE: M) reported strong 1Q18 revenues and profits. A healthy consumer spending environment plus clear signs of innovative successes from new CEO Jeff Gennette’s team supported the quarter’s improvements. Macy’s remains significantly undervalued and provides investors with a 5.8% dividend along the way.
Toy maker Mattel (NYSE: MAT) reported encouraging 1Q18 results. Global revenues grew 2% excluding the lost sales from the ToysRUs collapse, on strong Barbie and Hot Wheels sales. While operating profits remain deeply negative and the CEO turnover appears disruptive, we believe the changes actually keep moving Mattel in the right direction.
With cash balances greater than their debt, these companies have the financial flexibility to weather the challenges without great concern about principal or interest payments. And once the storm clouds clear, shareholders could see a sizable profit.
In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example. With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.
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."