You can’t just buy any down-and-out stock and expect it to bounce back. Many of the best out-of-favor value stocks have this little-discussed trait in common.
If a company has ineffective leadership, a lackluster product or service roster, bloated costs or other chronic problems, it will continue to struggle. Rarely will they get better on their own. Worse, in our highly competitive and innovative economy, weak companies may be on a slow (or fast) track to their demise. Their shares will likely remain laggards, as well. Buying the shares of one of these companies simply because they are cheap or out-of-favor value stocks can be a disastrous investing strategy.
The most attractive value stocks are those that have some reason to return to favor. There needs to be a visible solution at hand for the underlying company’s problem – a catalyst for change. Catalysts can include new leadership (a new CEO or board chair), interest from an activist investor, emergence from bankruptcy, a spin-off transaction and others. A strong catalyst can jump-start a struggling company toward a more prosperous future.
Finding catalysts can be difficult, however. Stock screens, a widely-used source of ideas, don’t include catalysts. High-profile CEO changes or activist campaigns make the headlines, but most catalysts occur quietly and can be arduous to find. Hedge funds and other specialists have proprietary catalyst sources, but they don’t share them with other investors.
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For these reasons, we have created our own Catalyst Report. This monthly publication, included with a Cabot Turnaround Letter subscription, is an extensive listing of companies that have experienced a recent catalyst. Some are strong enough to turn today’s laggard value stocks into tomorrow’s turnaround winners. In a typical month, we list 40 or more companies with meaningful catalysts. We encourage you to take a look – it is popular among our subscribers and unique on Wall Street.
One highly effective technique is to find Catalyst Report companies that also have out-of-favor stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. Often enough, some of these names become Buy recommendations for the Cabot Turnaround Letter.
2 Out-of-Favor Value Stocks to Buy Now
Earlier this year, the Catalyst Report highlighted McAfee Corp (MCFE) and Danone S.A. (DANOY) as having out-of-favor stocks with major changes that could drive their shares higher.
McAfee (MCFE) – The October 2020 initial public offering of McAfee, a global technology security company, marked an important change in the company’s ownership and priorities. A second and equally powerful catalyst was its March 9 announcement that it was selling its Enterprise business for $4 billion in cash. The shares have moved sharply since then, helped further by its $4.50 special dividend.
Danone S.A. (DANOY) – Danone is a global food company, with sales of nearly $30 billion, that specializes in yogurts, bottled water and other health-oriented products. The shares have gone nowhere in 15 years. After the former CEO was ousted in March for chronic underperformance, the board lured respected executive Antoine de Saint-Affrique to turn around the company. Recently, Danone announced that its entire board of directors will retire by 2023, a powerful catalyst that paves the way for more aggressive changes.
With the Cabot Turnaround Letter’s contrarian investment strategies, we do all the extensive idea searching and analysis to help you benefit from out-of-favor stocks. Our capabilities save you time while boosting your chances of profitable investing. If that sounds interesting to you, click here.
Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!Learn More >>