This month's purchase recommendation is a mid-cap building supplier that has been plagued by several internal issues as well as worries about a possible ending of the housing cycle and the economic expansion. While the narrative isn’t very appealing, we believe the reality is much brighter.
After a long period of enthusiasm for homebuilders’ stocks during the post-financial crisis recovery, the market has closed the door on this group. A major worry is that the housing cycle may be ending, partly due to recession fears and partly due to rising mortgage interest rates (approaching 5%), increasing home prices and new limits on the deductibility of property taxes that all make affordability a challenge to many potential buyers. Adding to the revenue pressures are higher labor, materials and land costs that combine to threaten homebuilders’ profits. However, unlike the excesses that built up during the 2006-2008 housing crisis, there is little evidence of an impending collapse.
Copper mining firm Freeport-McMoran (NYSE: FCX) reported mildly disappointing 1Q18 results. Shares fell sharply, partly due to the earnings but more related to the newly emerged environmental standards that threaten the company’s negotiations with the Indonesian government on the Grasberg mine. We think this will ultimately not impede an agreement.
A recent debt refinancing should provide considerable financial flexibility, but it involves an intentional, technical default that has rattled shareholders and threatens a potentially costly legal entanglement. As a still quite leveraged company tied to the strength of the housing market, this company's shares carry significant risks, but we think those risks are outweighed by the upside potential in the stock.
Industrial conglomerate General Electric (NYSE: GE) reported results ahead of consensus estimates and re-affirmed all of their 2018 guidance. GE Industrial results showed some improvement and GE Capital’s restructuring remains on-track. The new leadership is taking the right actions.
Engineering and construction firm McDermott (NYSE: MDR) rejected a $7/share hostile takeover bid from Subsea 7, a well-capitalized Luxembourg offshore energy services company. McDermott reports 1Q18 earnings tomorrow, although they pre-announced results on April 12.
Infrastructure company Layne Christensen (Nasdaq: LAYN) finally appears to be on a path to meaningful improvement after a long and difficult struggle since our 2013 recommendation. The road ahead is still bumpy but brighter.
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."