Turnaround investing can be very profitable. But how do you go about selecting the most potentially lucrative opportunities? At The Turnaround Letter, we've come up with some basic rules for spotting successful turnaround stocks, and here's one of them: Look for management changes. Just as real estate experts say there are three keys to success in real estate--location, location, location--we believe there are three keys to success in turnarounds--management, management, management.
A change in senior management is generally a good sign. First, it indicates that the board of directors recognizes that the company has serious problems. This is often one of the largest hurdles to a recovery. Second, it usually brings in a new skill set tailored to addressing the problems. If existing management did not have the skill to keep a company out of trouble, it is not likely to have the skill or the mindset necessary to get the company back on its feet.
Third, it sends a signal that "business as usual" inside the company will be replaced with a greater sense of urgency and frugality. This often is enough to redirect employees' priorities and unleash new and productive ideas.
Finally, it can free the company to meaningfully shift its strategic priorities, including how it allocates capital, approaches customers and operates its businesses. The announcement of the hiring of a turnaround veteran is not, however, a sign that investors should immediately buy the company's stock. Even the best turnaround managers may take a long time to revive a company and return profitability. This is best measured in years not quarters, and there may be more bad news still to come.
More Turnaround Tips