I’ve been a Virginia basketball fan since I was nine. And this is a column I never thought I’d write.
The University of Virginia men’s basketball team are the 2019 national champions. The same Virginia basketball team that my father (who went to UVA) had season tickets for when I was growing up in Richmond, Virginia. The same Virginia basketball team that had never won a national championship in its history prior to Monday night’s heart-stopping overtime victory over Texas Tech. The same Virginia basketball team that became a national laughingstock a year ago, becoming the first No. 1 seed to lose to a No. 16 seed (the University of Maryland-Baltimore County, more commonly known as UMBC) in the history of the NCAA Tournament.
Less than 400 days later, Virginia basketball completed one of the great one-year turnarounds in sports history. Guided by the steady, calm hand of their brilliant head coach Tony Bennett (no, not that Tony Bennett), their ability to bounce back from unprecedented ridicule is a great lesson in perseverance. There’s also an embedded lesson for investors.
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Pick a stock, any stock, that looks like a dud today. Where will it be a year from now? Did the stock get knocked back – mocked, spit on, left for dead – because of a disappointing quarter, an embarrassing tweet from its CEO, a round of store closings or some other cost-cutting measure? If so, take a closer look at the company. Is the bad quarter or bad news part of a developing trend, or a short-term aberration?
Overreaction is the default in today’s culture, and that’s especially reflected in our news coverage. An otherwise dominant basketball team suffers an embarrassing loss at the worst possible time? The team is a fraud, the headlines insist. A good company gets hit by bad news? Sell the stock as fast as you can, the CNBC talking heads will tell you.
But if you’re a savvy, sober investor, you’ll wait. You’ll wait until the selling stops and the beaten-down stock establishes a clear bottom. If you like the company, you’ll buy at a discount, adhering to Warren Buffett’s truism to “be bold when others are fearful.” Chances are, you may have found yourself a great growth stock at an unnecessarily depressed share price.
Don’t believe me? Let’s look at a couple of relatively recent examples of Virginia-esque turnaround stocks - and another current candidate.
Three Turnaround Stocks
Turnaround Stock #1: Netflix (NFLX)
It’s hard to remember now, but a few years ago Netflix appeared in crisis – or at least Netflix stock did. In 2011, the company tried to split into two entities – with a dead-on-arrival spinoff called Qwikster. The idea was quickly scrapped, and founder Reed Hastings sent a sloppily worded (and probably alcohol-fueled) late-night email to subscribers trying to explain his rationalization. Investors bailed on NFLX like it was a canoe taking on water: the stock plummeted from 42 to 9 in just four months. It didn’t truly get going again for another seven months. But from July 2012 to July 2013, NFLX stock was up more than 400%. It has risen 10-fold more since then.
If you bought NFLX on bad news in late 2011, early 2012, you made a ton of money!
Turnaround Stock #2: Chipotle (CMG)
In a way, Chipotle still hasn’t fully recovered from its e. Coli outbreak disaster in late 2015. When you’re a restaurant chain, it’s tough to come back from poisoning dozens of customers in 11 states.
But, if you waited for CMG stock to establish a clear bottom (it didn’t fully happen until October 2016), you would have earned a 32% return in seven months, and (if you had held on through some bumpy rides) would have nearly doubled your money by today. Not bad!
Turnaround Stock #3: Boeing (BA)???
For years, this aircraft manufacturer has been one of Wall Street’s most reliable performers. The company has grown earnings every year since 2012, and sales have improved all but one year since 2010. Meanwhile, Boeing stock has roughly tripled in the last five years, outperforming the S&P 500 by more than 3-to-1.
Then came the Ethiopian Airlines crash last month, killing more than 100 passengers on board the Boeing 737 MAX jet. The news doesn’t get any worse for a company than that, and investors couldn’t sell out of BA stock fast enough, perhaps out of principle in some cases.
But Boeing stock has started to stabilize, and our Tom Hutchinson insists it will be a good value investment going forward. Perhaps he’s right. With more time, perhaps investors will have the stomach to buy shares again in a company whose faulty manufacturing was the cause of such a tragedy. I’d give it more time to establish a clear bottom. But given its strong fundamentals and history, BA is definitely a prime turnaround stock candidate.
Bottom Line on Turnaround Stocks
Whether it’s Boeing or not, there’s a prime turnaround candidate out there – a stock whose redemption is just beginning. Before it happens, the stock will have its own UMBC moment, hitting rock bottom the way Virginia did a year ago. The turnaround might appear impossible at the moment. But fortunes and narratives change quickly on Wall Street.
Almost as quickly as they do in basketball.
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