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Turnaround Investing

Turnaround investing is taking a position in a company that has encountered severe financial and operational problems, which have decimated both the company’s stock price and business model. In many cases, the company’s own survival is questionable. It’s really a private equity or hedge fund game. These professionals have access to hard-to-get information on the internal performance of a company. Nevertheless, for large and small investors alike, the risks are enormous, but the returns can be substantial (over 40% per year).

An area of particular interest are those public companies that emerge out of bankruptcy with relatively clean balance sheets, revenues in excess of a billion dollars and that are operating at a breakeven or better cash flow. Information on these companies is usually hard to come by, their valuations, however, are usually low. These newborn companies can have good growth potential. Some of the telecommunication companies fit this model. 

Another way to play this game is to find a Fortune 500 company that is right on the edge of bankruptcy, its stock market value substantially wiped out, and is completely out of favor. Such a company may have some unique facets, or profitable divisions, that can be revitalized to carry the whole organization upwards and back to profitability. The risk is extreme, though! Most have management problems, product problems, are in cyclical industries, are facing law suits; the list goes on and on. It is more than restructuring the balance sheet; you have to change management, restructure debt, fix the company operationally, reduce cost structures, develop new products and get them to market, settle lawsuits, fix bad acquisitions, etc. The truth is, the turnaround task is beyond the abilities, skill sets, and education of most managers. For those companies that do turn around, a lot of it is luck. Never bet on a proven manager the second time around. That said, it is very profitable when you invest in a turnaround situation that is successful. Chrysler and Toys “R” Us are good examples of classic turnaround companies. 

Sanyo is a more recent example of a company going through a turnaround. The company lost its focus and over expanded, under invested in its businesses, then lost billions of dollars when the CRT TV market transitioned to flat screen TVs. To cure their ills they changed management, streamlined operations, sold non-core businesses, and raised billions of dollars in equity. They are now starting to introduce exciting new products to the marketplace.  At six dollars a share, down from approximately $50 a share a few years earlier, they look like a prime turnaround play, but only time will tell. 

When participating in turnaround companies, always make your purchases through a full service brokerage firm. As part of their higher commissions, they evaluate if your investment selection matches your risk profile and if your income and net worth are adequate to support the investment risk. Always follow the brokers’ advice on this issue, if they feel a particular security is not a good fit, pass on it.    

 


 

 

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