Productive Turnaround Management Changes

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.

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IBM: Not Yet Time to Swing at this Pitch

IBM’s stock underperformance since IBM’s current CEO took the helm in 2012 has been stark, with the shares declining 23% while the S&P500 Index has more than doubled. One big problem: revenue growth rate is zero, at best. Without revenue growth, what’s left to entice investors? The real driver of value at IBM – free cash flow that is used to repurchase shares. Can IBM borrow its way to shareholder prosperity as its cash flows shrink? What to do with IBM shares? Wait for a better pitch in the form of a catalyst or much lower valuation. Read More.

Comparing Stocks Vs. Bonds

While the common stock of a turnaround candidate usually has the greatest upside potential, other classes of securities, such as bonds or preferred stock, may offer attractive profit possibilities with less risk. Many turnaround companies have only one class of securities available to investors but where there are different classes to choose from, it can pay to do a little extra analysis of the various options.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-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."