One strategy that is popular with investors who like to take a little risk is purchasing ‘turnaround’ stocks—shares of companies that have produced lackluster results for some time. Those less-than-stellar results could include declining revenues, increasing losses, employee layoffs—all accompanied by a sinking stock price. The reasons for the issues can also be varied: ineffective management, rising and/or better competition, a declining or obsolete product or just general economic troubles.
But finding those companies isn’t easy. Just because a business has had extended poor performance doesn’t mean it’s ready to reform its ways. In order to be an investment consideration as a turnaround, a company must be, as George Putnam III, editor of The Turnaround Letter and one of our regular contributors says, the company must be “temporarily out-of-favor, have real value and be poised for a rebound.” And George knows what he’s talking about. His newsletter’s returns have beaten the S&P 500 by 2-to-1 for the past 15 years.
Most investment pros would agree that in order to affect a successful turnaround, a company must take these three steps, at a minimum:
• Recognize its problems
• Consider changing management
• Devise a strategy to resolve its problems
These Three Companies Are Making Headway
At the beginning of the year, George wrote an article outlining three stocks that he thought would be successful turnarounds in 2016: Globalstar (GSAT), Mattel (MAT) and Royal Dutch Shell plc (RDS.A and RDS.B).
For Globalstar, George’s analysis found that the company’s upgraded satellite network would give it a leg up on its competitors, reduce costs and perhaps create a whole new market with its development of a new WiFi spectrum called Terrestrial Low Power Service. GSAT—a very small-cap, inexpensive stock—is up 81% since his recommendation in January.
Mattel was chosen because the company had a new CEO who was shaking things up. The company was aligning itself with businesses outside the toy industry (like Google) to collaborate on virtual reality technology, reducing costs and expanding its international markets. Result: Mattel stock has climbed 20% in the past few months.
Of course, Royal Dutch Shell—operating in the oil industry—was greatly affected by declining oil prices. But George correctly predicted that oil prices would rise again, and he saw value in the company’s ‘rock-solid balance sheet,’ healthy dividend, wide diversification and solid cash flow. Both RDS-A and RDS-B shares have risen 17.3% since his recommendation.
One More Turnaround to Consider
All three companies remain in The Turnaround Letter’s portfolio as Buys, and last month, in Wall Street’s Best Investments, George’s Crocs (CROX) recommendation was our Spotlight Stock.
Crocs certainly fits the bill as a turnaround stock: a wildly successful IPO at the price of $21, sales growth from $109 million in 2005 to $850 million by 2007 followed by a 24% decline in sales just two years later, and the coup de grace—a stock price that slid 99% to $0.94.
The shares came back above $30 in 2011, but new management (with little shoe experience) and a focus on top-line growth sent profits reeling by 2013. Finally, private equity firm Blackstone came on board in 2014, and its $200 million investment opened the door to a better future for the company. A new shoe industry veteran CEO was hired and he immediately began cleaning house, tossing out most of the senior managers, closing unprofitable stores and trimming certain distribution partners. With a new focus on the bottom line, it looks like this turnaround will be a success story.
George has a $13 price on the stock; it is currently trading around $10.35, so it still has some room to grow.
If you have room in your portfolio for more speculative companies, you might consider one of these turnaround possibilities to help boost your returns.
Happy investing,
Nancy Zambell
