Many retailers are struggling now; a few have declared bankruptcy. But there are plenty of good turnaround stock candidates, including in the retail space.
Last month, in these pages, I wrote about the coronavirus effect on retailers, noting the rise of store closings as well as bankruptcies and listing three shopping center REITs that could be compelling long-term rebound plays. But the pain for many retailers is far from over. Coresight Research recently increased its projected store closures for this year, from 8,000 (reported at the beginning of the year) to 15,000 (March numbers) to 25,000 now.
And the bankrupt companies have now been joined by Hertz, Tuesday Morning, restaurant chain Le Pain Quotidien and Advantage Rent-A-Car. Industry watchers expect that May bankruptcy filings will double this month.
But it’s not all bad news. After all, bankruptcy isn’t always the end; sometimes it marks the beginning of a turnaround, especially if a company files Chapter 11, allowing it to reorganize itself, restructure and move forward. If it files Chapter 7, that’s the death knell, leading to liquidation. But there are potential turnaround stocks among the struggling companies, perhaps even including those on the brink of bankruptcy. More on those in a bit.
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There’s a Precedent for Surviving Bankruptcy
The odds aren’t great; only about 25% of companies filing Chapter 11 survive. But there are many success stories—businesses that rose from the depths of bankruptcy to not only survive, but thrive, including:
Ally Financial (ALLY), formerly GMAC, the auto-financing arm of General Motors, was taken down by the 2007-2009 recession, but recovered, and the shares were going great until the March market rout.
Marvel Entertainment, which brought us comics Spiderman, The Avengers, and Guardians of the Galaxy, filed for bankruptcy in 1996, but came back, and Disney purchased the company in 2009 for $4.24 billion.
Converse is another example of a resurgence that ended with a buyout. The company filed for Chapter 11 bankruptcy in 2001, and Nike bought the athletic wear company in 2003 for $39.1 billion.
Hostess (TWNK) almost caused a riot among Twinkie lovers when the company almost failed after declaring bankruptcy in 2012. Fortunately, we sweets connoisseurs avoided disaster—and so did the company—when a private equity firm invested $375 million in 2015. The company went public again in 2016.
Six Flags (SIX) declared bankruptcy in 2009 (thanks to the recession), after seeing its debt rise to almost $3 billion. However, a bond issue extended ownership to the holders and the company wiped out $1 billion in debt. Time will tell how COVID-19 will affect its 26 theme and water parks, which are scheduled to begin opening on June 5.
Which Companies Will Turn Around?
There’s no magic eight ball to determine which of the companies currently filing bankruptcy will survive and turn around their fortunes. Know that most won’t make it, but a few will become great success stories for the investors who take a chance while the businesses are struggling.
But the question is, how do you predict which ones will be successful?
George Putnam, III, editor of The Turnaround Letter, and a contributor to my newsletter, Wall Street’s Best Investments, uses the following criteria to answer that question:
- New management and/or board oversight
- Credible shareholder exerting pressure
- Spin-off transaction (both sides)
- Fresh start after emerging from bankruptcy
- Imminent cyclical upturn
- Temporary legal /product problems
But as George says, “We invest as if we are buying the entire company, not just a ticker symbol. We are not traders or crowd-followers. Given the multi-year holding period and less-defined futures of our recommended names, our stocks carry higher risk and generate higher volatility than the overall market.”
That means he’s in it for the long term. And that’s the strategy you need to adopt to make turnaround investing successful.
I’ve seen reports that, despite their big debt positions, some analysts believe that J. Crew, Neiman Marcus, and even J.C. Penney might survive their bankruptcies. But figuring out who is going to survive bankruptcy is a long bet, and one that I won’t take right now.
However, there are still plenty of companies that haven’t filed for bankruptcy but are suffering right now, yet have the potential to spring back. And with that in mind, I did a bit of digging and found three that I believe have the right stuff to turn around.
3 Potential Turnaround Stocks
Turnaround Stock #1: Ulta Beauty, Inc. (ULTA)
With 159 stores, Ulta is the largest beauty store operator (for lots of reasons, including store organization, pricing, and helpful staff), but coronavirus has hurt its in-store sales. The company’s shares are down 31% from their 52-week high. However, its online presence is robust. The stores began reopening in mid-May, which should help boost the stock.
Turnaround Stock #2: Nokia Corporation (NOK)
A communications giant, Nokia has never really recovered from the last recession. However, it’s looking like 5G will boost its fortunes. In its first quarter, Nokia brokered 70 commercial 5G deals and installed 21 live networks. Analysts are coming back to the stock, predicting a 30% growth rate for the company this year. And while you wait for appreciation, you can enjoy Nokia’s 5.13% dividend yield.
Turnaround Stock #3: ADT Inc. (ADT)
Coronavirus also weighed down this security equipment provider, causing its net loss to deepen. However, revenues rose to $1,370 million, up 10%, in its latest quarter, beating the Street’s forecasts by $0.09. With home security needs increasing with cutting-edge technology, ADT stands to gain a nice share of that market. Analysts are beginning to notice the company again, and estimate a 52.6% growth rate for this quarter. ADT also has a dividend, yielding 1.76%.
Of course, only you can determine if any of these potential turnaround stocks are suitable for your portfolio, but they do look interesting. But turnaround stocks are speculative, so buy with caution.
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