U.S. Markets closed

BP, JC Penney, Netflix: When to Buy a Turnaround Stock


Click! Follow Us on Facebook!

BP (BP) is down today after a court ruled that the company would have to indemnify former partner Transocean (RIG) for economic damages resulting from the 2010 Gulf disaster. The outcome and subsequent decline in BP stock helps illustrate an oft-forgotten truth of "turnaround" plays: companies can change their business practices, names or attitudes but accomplishing a complete 180 in either performance or stock price takes years, at best.

In a special edition of Dos Hombres I teamed up with Yahoo! Finance colleague Aaron Task to discuss BP as well as two other recovery stories in the news this week, Netflix (NFLX) and JC Penney (JCP).

Obviously the BP spill was a human and ecological disaster far outweighing the troubles of a DVD rental company and a retailer. Still there are commonalities between all three, namely: stock volatility, inept management, and an endless series of stops and starts on the road to a recovery which may or may not ever happen.

In many ways BP has had less of a challenge than NFLX or JCP. BP's stock crash resulted from a one-time tragedy magnified by inept management. NFLX and JCP's stock slides were a function of periods or even years of mismanagement, not to mention the possible obsolescence of their business models. BP's top priority was just to stop the bleeding. After initially exacerbating their woes, the oil giant has done solid work towards that end; handling the threat of much larger class-action suits, setting aside cash for future rulings, and generally keeping its head down and going about its business.

Meanwhile, Netflix now concedes that their core business, DVD rental by mail, is going to erode month by month, quarter after quarter until disappearing entirely. The stock is up a stunning 72% year to date; blinding investors to the fact that the company is starting a new business largely from scratch in a crowded market place. Beyond "Netflix the brand" there is little if anything to distinguish between the company's new streaming business and similar offerings from Amazon (AMZN), HBO, and every cable company or content provider in the world.

Then there's JC Penney, whose tumble was the end product of a secular shift away from department stores as a whole, exacerbated by inept management. The company brought in Apple (AAPL) retail guru Ron Johnson to design a revival. After some initial resistance to his ideas, Johnson used the second day of a two-day investors' meeting this week to outline his plans to reinvent the retail landscape. JCP is set to go from the most tired brand this side of Sears (SHLD) to a gleaming picture of what big box stores can be.

As a former merchant, Johnson's plans are nothing short of dazzling. If he can pull it off he will truly have saved the department store model. But that's a HUGE "if." JCP doesn't have the resources or clean slate Apple had when Johnson was creating those wildly popular stores. Penney's is still regarded as a dump and has legacy issues throughout its food-chain, from suppliers to displays.

JCP's stock rose nearly 20% yesterday and is up strongly for the year. Not quite irrationally exuberant moves, but not exactly fundamentally driven as well.

Netflix and JC Penney could very well come back to life as viable concerns. JC Penney in particular is a compelling story. That said, these stocks' gains reflect a great deal of buy-in on the part of shareholders before anything has actually been accomplished. It may be hard to resist jumping on board before the trains leave the station. I'm not going to tackle you before you try to buy either NFLX or JCP. But before you do, pull up the story of BP and note the stock has never made it back to where it was when that ill-fated rig exploded. For every Apple turnaround there are 20 Research and Motions (RIMM) and Kodaks who never make it back. If a company has really done a 180 you'll have plenty of time to get long after the bottom is in.