Everyone loves a good turnaround story; assuming you catch the rebound, not the downturn. There’s high risk/reward investing in a company that was once left for dead, and being selective is a must. A beaten down stock price is not necessarily a bargain, but a potential rebound can pay off big.
“You have to be skeptical with turnaround stories, obviously these are companies that had near-death experiences for probably very good reasons,” says Kiplinger columnist Kathy Kristof, in the attached video. “It’s a riskier segment of the market, but that also often means you have more potential for profit.”
Kristof recently wrote about five comeback stocks that each have different reasons for the investor to believe in their turnaround plans.
First on her list is Beazer Homes (BZH) –the Atlanta-based homebuilder that almost went under during the Great Recession. Shares hit rock bottom at $1.25 in March 2009. They’ve since rebounded over 600%.
“Right now they’re gaining, the market is strong, interest rates are still low even though a lot of homebuilder stocks got hit when the Fed indicated interest rates are going to start rising,” says Kristof. “But there’s still a lot of health in the real estate market and there’s reason to think Beazer can do quite well.”
Next up is Chiquita Brands International (CQB), a company that lost its way in 2012, but took decisive action to change leadership. Chiquita CEO Edward Lonergan was brought in to turn sales around and manage a heavy debt load.
“When you’re looking at a comeback story, you want to see that someone else is leading it. In this case [Chiquita], there is a turnaround specialist, they’ve been cutting costs dramatically, limited their brands, and are really focused on bananas.”
Lonergan got his company back in black, turning a first-quarter profit of $2 million versus an $11 million loss during the same period last year.
Serving Up a Deal
Groupon (GRPN) was hot, until it was not. Daily deal fatigue hit this Internet company hard after going public in November 2011 at $20 a share. Just a year later shares hit rock bottom at $2.63 in November 2012. Andrew Mason, co-founder of the company, was ousted as CEO last February.
Interim co-CEOs Eric Lefkofsky and Ted Leonsis, the Chairman and Vice Chairman of the Board, respectively, are leading the turnaround effort.
“The founders really believe this company has the potential to have $100 billion in revenues and that they will become profitable someday,” says Kristof, likening them to Amazon (AMZN) in the early years, which lost a lot of money before emerging into a household name.
Groupon shares are up 240% since their November low.
MGIC Investment Corp (MTG) is one of few mortgage insurers to survive the financial crisis. The surge in foreclosures caused MGIC to bleed $5.3 billion in cumulative losses since 2007.
“The mortgage market is looking better, there are far fewer foreclosures, there are fewer loans in delinquency, and so things are looking considerably better,” she says. “They weathered the real storm when they lost billions upon billions of dollars, so now I think they can come back.”
Prescription for Profit
Finally, Rite Aid (RAD) has quietly emerged to become the nation’s third largest drugstore chain through a series of acquisitions. However, its growth was nearly too far too fast after purchasing Eckerd in 2007. The debt burden and trouble with store integration, combined with the recession, caused Rite Aid to lose billions of dollars. In March 2009, Rite Aid hit $0.20 a share.
“Now they’re in divestiture mode, they’re getting rid of a lot of the less profitable stores, and that should make them a lot more profitable in the long run,” says Kristof. “Meanwhile, they’re selling for about a third to a fifth of what the other drugstores are selling for in the market.”
Rite Aid shares briefly topped $3 a piece last month. They’ve since come off a bit, but still remain over 1000% higher than their March 2009 lows.
To conclude, Kristof offers key advice to be taken with any investment: “Be careful, be diversified, and make sure that you understand the story.”
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