Saturday, 25 July 2015

Turnaround Stocks: U-Turn To High Returns

https://www.colourbox.de/preview/8490861-turnaround-in-word-collage.jpg
  Source: Investopedia

Weeding through beaten down companies to identify a turnaround stock can be a thorny situation. It's tedious and time consuming, and even if you feel you've done all your homework, the pick could still go bad. In this article we'll show you some harbingers of a turnaround situation that will help you isolate the flower from the weeds.

There are three root causes of corporate rejuvenation. They include: a sales jump, cost-cutting initiatives and new products. Let's take a closer look at them and some stocks that have turned around as a result of these changes.

1. A Sales Jump: While change at many public companies can proceed at a glacial pace, there are times when a company turns around on a dime to experience dramatic sequential or year-over-year improvements in sales.

A terrific example of just such a reversal of fortune can be found in an analysis of IBM (NYSE:IBM) in the mid 1990s. Prior to fomer chief executive Lou Gerstner's arrival on the scene, the computer giant was struggling. In fact, its product arsenal was downright paltry, and some investors questioned whether the company would be able to compete with the likes of Hewlett-Packard (NYSE:HPQ) and Apple Inc. (NYSE:APPL) over the long haul.

But Gerstner changed all that. Under his leadership, IBM introduced a slew of new products and focused increasingly on offering business services as well. In addition, he presided over a huge cost-cutting program that eliminated millions of redundant expenditures. This allowed the company to invest in future growth opportunities. 

The result of Gerstner's efforts showed through IBM's sequential and year-over-year improvement in net sales. In fact, on an annualized basis it grew revenue from $64 billion in 1994 to more than $87 billion by 1999, a major improvement for a company that was already among the nation's largest. Not surprisingly, the share price also increased during this time, from the $30 range to more than $100 per share by 1999.

 The lesson in this is to pay particular attention to companies that have shown marked improvements in sales, because it is a strong sign that better times - and higher stock prices - may lie ahead.
 
2. Major Cost-Cutting Initiatives: Even if a company isn't dramatically growing sales, it can still enhance shareholder value and drive its share price higher through aggressive cost cutting. Let's take a look at how Kimberly Clark (NYSE:KMB) managed to turn around its stock through this measure. 

In July 2005, the well-known maker of health and hygiene products announced plans to cut 6,000 jobs and sell or close up to 20 plants. Management said the cuts could save the company as much as $300 to $350 million annually by 2009. Perhaps even more importantly, it would free up resources so that the company could expand its business in China and focus on high-margin end products, such as diapers and paper towels.

Soon after this major cost cut, Kimberly Clark started to see some sizable savings. The stock reversed course and by March 2008 was trading almost $10/share higher than it did at the end of the 2005.

3. New Products in the Cards: Due to the after-effects of the tech bubble burst, a sluggish product pipeline and tough competition from companies like Microsoft (Nasdaq:MSFT), Apple's stock was struggling by late 2001.

Then along came a little product known as the iPod. While the iPod wasn't a sensation right off the bat, it was a solid product aimed at a very good consumer base, which helped it gain some valuable traction over its first few years. As new generations of the product hit the shelves - and everyone from celebrities to politicians were spotted with them - demand picked up quickly.

As of October 2007, the company had sold more than 120 million of the little gadgets, and it is a major reason why Apple is one of the top resurrection stories of the past decade. While not all new product releases will ultimately be a success, a new item often generates a lot of buzz in the investment community if it has the potential to drive the company's sales materially higher.

Bottom Line: Be on the lookout for one of the above catalysts at a struggling company, because they are often the first signs that a turnaround may be in the works. And, you don't have to get in at the beginning of a turnaround to profit, getting in on a rising company that looks to have long-term potential is still a solid investing technique.

36 comments:

  1. Sir can you help us on how to read charts
    Br Anurag

    ReplyDelete
    Replies
    1. Anurag you can use google for such queries, There is not a single way to read a chart, there are various views.

      Delete
  2. Dear ACE,
    I had bought PALRED TECH around 25.5 - 5000 shares. After freeze in trading I received Rs.16.5 per share and total holding reduced to 2000 shares with avg buy of around 36 as company reduced the capital by 60%.

    So eventually when stock closed at 46.7 I was in profit of almost Rs20 x 5000 = 1 L
    not with reduction I am in profit of Rs10 x 2000 = Rs20k.

    Is my calculation correct as virtually profit has wiped off by significant amount due to capital reduction..

    So wondering what benefit small shareholder got from such cap reduction?

    Sorry for my lack of understanding and wanted to get your view on it.

    Thanks again for wonderful picks as always.

    Shashank.

    ReplyDelete
    Replies
    1. After the reduction price will not remain at 46.70 sir, the price will be adjusted as per close on record date and capital reduction.

      Delete
    2. Thanks ACE for your reply. Do you know what price it would be based on Rs46.70 as closing date?

      I think you indicating that price will be higher as capital got reduced by 60%?

      Thanks ACE for responding to my query and having patience.

      Reg,
      Shashank

      Delete
  3. A good article sir.
    Please look into uv board Ltd.

    ReplyDelete
    Replies
    1. TBH: Haven't found time to study this one.

      Delete
  4. But sir we might be late in uv board. If it is marged with uniply industries. Share price of uniply multiplied by 6 times in last 3-4 month.

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  5. Guide me on Pondy oxide buy @120 quantity 300shares

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  6. SIMARAJUL DESAI27 July 2015 at 21:35

    sir any idea on dion global anjani portland cement keerthi industries,subex mehgmani organic i am holding in all the above mentioned shares

    ReplyDelete
  7. Plz advice on vinyl chemical? ?
    Bad result??
    Can I still hold??

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  8. When is your next recommendation coming up?

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  9. Plz study uv board ans guide us

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  10. Sir, Parnax Lab was not moved beside posting good Q4 result , Sir ,What are the comments on next financial years ? I am holding 3500 shares .Please guide me .

    ReplyDelete
  11. Do you know what price PALRED would be based on Rs46.70 as closing date?

    I think you indicating that price will be higher as capital got reduced by 60%?

    ReplyDelete
    Replies
    1. In my view it will open above 92 (adjusted price of last closing 46.7) after 60% capital reduction.
      Lets wait till 2nd week of Aug.

      Delete
  12. Sir pl have look on uv board. It's group co is uniply industries. Recently Mr bansali and damani entered with prefrencial allotment in uniply. And uniply will be marged with UV Board.

    ReplyDelete
  13. Sir your view on lg balakrishnan brothers?

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  14. Dear Ace Sir, please ur view on entering Vidhi & Waterbase at CMP. will it be a sound decision if it is for medium to long term.
    Also ur view on Force Motors (appreciated more than 50% in just 10 days)

    ReplyDelete
    Replies
    1. Vidhi and Waterbase have appreciated a lot, Margin of safety might be reduced at CMP but the growth factor and overall fundamentals of the company remain attractive.

      Delete
  15. Sir Whats your Views on VISAGAR POLYTEX ( VIVIDHA )...........Shall i enter in current level....Please suggest me .............

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  16. Ace bhai .. what are your views on AIMCO PESTICIDES? ?

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  17. Sir, your views on technocraft industries and punj lloyd?

    ReplyDelete
    Replies
    1. PUNJ technically good but no idea on Techno.

      Delete
  18. Sir your view on Bank Of Baroda

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  19. Dear Ace Investor, Any new recommendation in the offing please!!

    ReplyDelete
    Replies
    1. Have been travelling and right now in Bangalore, Studying few companies... hopefully something good to offer soon!

      Delete
    2. Thank you Sir and will wait eagerly for the same!

      Delete
  20. Hello prem Ji,

    What's ur views about Hindustan tin works after q1 results??
    Thanks

    ReplyDelete
  21. Hi Ace, your views on SKM results and any thoughts on why results dont seen to have had an effect on the stock ?

    ReplyDelete
  22. Dear Premji,

    What is your view on country club hospitality at CMP 13.70 will it have a potential to be a multibagger.

    Thanks

    Amudhan

    ReplyDelete
  23. Dear ACE. INVESTOR. A retired employee seek your advise for the stock on 5 year horizon.kindly advise ... ramakant.tree@gmail.com

    ReplyDelete
  24. sir what is your veiw on ONELIFE CAPITAL ADVISORY , my average buying cost is 95
    what is your target?how long is your target

    ReplyDelete