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.
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.
