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16 Stocks to Buy Before They Turn It Around

Vince Martin

In any market — bull or bear — investors can always find turnaround stocks to buy. Companies are no more perfect than the humans that comprise them, after all. Mergers go south. Poor management can decimate morale. Sometimes, the world changes — and it takes a few years for a business to catch up.

Those turnarounds can drive substantial value — even before the turnaround is complete. Chipotle Mexican Grill (NYSE:CMG) more than doubled this year (in a little over six months) thanks to a new CEO and simply some progress in fixing its myriad issues. Vitamin Shoppe (NYSE:VSI) went from $4 in April to $13 in August. Perhaps most famously, Apple (NASDAQ:AAPL) was left for dead in the 1990s before founder Steve Jobs returned and established the foundation for that company’s trillion-dollar valuation.

The catch, of course, is that turnarounds don’t always work. And it’s not simple to tell the difference. Are the problems of a business fixable? Or has the company fallen behind to a point where it can’t catch up? Investors in turnaround stocks need to be aware of that risk — and ready to move on if progress isn’t made.

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These 16 stocks all have turnaround potential. Whether they are turnaround stocks to buy is a more difficult question, as all have their challenges. But in a market still somewhat pricey, even after selling pressure this week, they provide potential value (if they can make the necessary improvements).

Nostalgia Doesn’t Pay for GE Stock


Source: Shutterstock

General Electric (GE)

There’s no bigger turnaround story in the market right now than General Electric (NYSE:GE). GE stock has been hammered, dropping from $32 at the beginning of 2017 to a nine-year low near $11 late last month.

At that point, the board had enough, removing CEO John Flannery after less than 16 months. And the new hire – Larry Culp, who turned Danaher (NYSE:DHR) into a powerhouse – has stoked optimism behind the GE turnaround. GE stock has risen 15% from the lows.

There’s still a lot more work to do here. GE Power is a mess, with the Alstom acquisition clearly a disaster and power turbine issues potentially leading to millions of dollars in repair and warranty costs. The dividend may face another cut after being halved last year. I argued back in May that a sum-of-the-parts valuation probably valued GE stock in the $12-$14 range – a range in which it already trades at the moment.

But that range also suggests GE might be worth a long look here. If Culp adds value, the stock should rise. After nearly 18 years under Flannery and Jeff Immelt, GE clearly needed new blood. And if Culp can work the same magic at GE that he did at Danaher, GE stock can become one of the best turnarounds in recent memory.

3 Reasons Under Armour Stock Has Likely Run Its Course


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Under Armour (UA, UAA)

Investors may have gotten ahead of themselves in buying the turnaround at Under Armour (NYSE:UA,UAA). UA stock has pulled back more than 25% from early June highs as of this writing, touching a five-month low in the process.

More patience should be advised. I’ve been more bearish on the potential turnaround here than most, but Under Armour does have a chance. Its category continues to grow, and if the company can get back to competing with rivals Nike (NYSE:NKE) and adidas (OTCMKTS:ADDYY), UA stock can bounce back.

The problem remains, however, that even after layoffs, cost cuts, and strategy changes, Under Armour stock simply isn’t that cheap. The multiple still suggests that years of growth are on the way. That may be the case, but I’d prefer to pay a much cheaper price when taking that bet.

Admittedly, other investors might see it differently — and indeed already have. And if Under Armour can get its brand fixed, sales growth should follow, leading earnings sharply higher. That’s a big ‘if’ — but as UA stock gets cheaper, the bet on the turnaround gets more attractive.

Why This Time It May Be Different for KMI Stock


Source: Roy Luck via Flickr

Kinder Morgan (KMI)

Pipeline and infrastructure operator Kinder Morgan (NYSE:KMI) is trying to recover from a disastrous performance during the shale oil bust. Amid plunging oil and gas prices, the company had to slash its dividend and issue equity. KMI stock fell over 75% from 2015 highs.

In response, Kinder Morgan has changed its tune. It’s focused more heavily on natural gas than more volatile oil. Spending has come down. The company is looking to cut its debt load instead of expanding at any cost.

There have been early signs of success. KMI stock bottomed in early April, and since has gained almost 25%. The dividend yields 4.3%, and management is targeting aggressive hikes over the next few years. I argued back in June that KMI was worth a look as the turnaround played out, and about 7% higher I still think that’s the case. The turnaround here is working — and isn’t over yet.

Macy's Stock Has Multiple Positive Catalysts and Is Undervalued


Source: Shutterstock

Macy’s (M) and JCPenney (JCP)

Three department stores. Three turnarounds. They show the difficulty — and the potential promise — of betting on turnaround stocks. For Sears Holdings (NASDAQ:SHLD), the end appears to be nigh. Bankruptcy rumors are swirling, which is no surprise: I argued last year the company wasn’t going to last very long. SHLD simply never was able to drive traffic or sales, leading to a likely wipeout of the equity and an uncertain fate for the company itself.

Two of its rivals still have some hope. At JCPenney (NYSE:JCP), the news hasn’t been quite as bad, but it’s hardly been good. JCP touched a new all-time low last month after its chief financial officer departed. A new CEO hired earlier this month created some near-term optimism, but the long-term outlook looks grim. JCPenney still has too many stores, too few sales, and too much debt. There’s a path to huge upside, as Dana Blankenhorn argued recently, but such an outcome seems unlikely.

The question is if Macy’s (NYSE:M) can be the exception to the department store rule. Optimism toward a turnaround — and the company’s valuable real estate — sent the stock to a 20-month low. Second-quarter earnings looked good — but they weren’t good enough. Macy’s stock has sold off since, dropping 22%.

The selloff might be too much. As Larry Ramer pointed out, M stock has multiple catalysts, including digital growth and the shrinkage of two of its longtime competitors. It’s certainly possible in the department store space that the third time will be the charm.

flowers


Source: Manel Zaera via Flickr

FTD (FTD)

One of the dangers of investing in turnaround stocks is that it can be very difficult to time the bottom correctly. That’s been the case for my investment in FTD Companies (NASDAQ:FTD). FTD looked cheap above $5 earlier this year; the stock now trades near $2.

There’s another problem here, though: FTD’s board ended its turnaround. After hiring a new CEO last year, and detailing a five-year plan in January, the company cleaned house in the management ranks. With the company hemorrhaging market share to rival 1-800-Flowers.com (NASDAQ:FLWS) and a reasonably heavy debt load, the lack of certainty is weighing on FTD stock.

But FTD represents an intriguing high-reward, and high-risk, play even at the lows. Qurate Retail Group (NASDAQ:QRTEA,QRTEB), part of the Liberty Media family, owns 37% of the company, and should look to protect its investment at some point. The sale of the non-core Personal Creations business could alleviate the balance sheet issues as well.

FTD’s turnaround hopes look dim at the moment, admittedly. But if the company can get back on track – or even start moving in that direction — the stock could rally in a hurry.


Source: Wikimedia (Modified)

Bausch Health (BHC)

The turnaround at Bausch Health (NYSE:BHC) — formerly Valeant Pharmaceuticals — already has taken hold. The stock touched a two-year high late last month before pulling back amid the market’s “risk-off” trading of late. But there’s a lot more to do.

Bausch still has some $25 billion in debt. Adjusted EBITDA still is declining, and key drugs are facing patent expirations, with Xifaxan under patent challenge.

Bausch is on the right path, however, under new CEO Joe Papa. Most notably, Bausch bonds have strengthened notably. Many now trade at a premium to par after being valued at 70-80 cents on the dollar, making it far more likely that Valeant will be able to refinance its debt — most of which doesn’t mature for several years. The Bausch + Lomb vision division is now the key earnings driver, which is one reason for the name change, and serves a growing contact lens space with room for operational improvements.

Valeant isn’t out of the woods yet and its turnaround isn’t over. But as that debt gets paid down, and the story de-risks, there’s a path for Papa to drive one of the most successful turnarounds ever. And that path looks much more open than it did just twelve months ago.

Campbell Soup CPB stock


Source: Meal Makeover Moms via Flickr (Modified)

Campbell Soup (CPB)

Right now, Campbell Soup Company (NYSE:CPB) looks like a mess. The company is facing a significant challenge from activist Third Point, has dumped its CEO, and M&A rumors are swirling. Disappointing sales — including a 3% drop in organic revenue in its most recent quarter — and margin pressure only add to the bad news.

But there is a chance of a turnaround here, or at least a change in strategy. Kraft Heinz (NASDAQ:KHC) reportedly has passed on buying the entire company. A standalone Campbell’s still has plenty of options. A breakup is a possibility. Further efforts to diversify away from the struggling legacy business, driven by recent acquisitions of Snyder’s-Lance and Pacific Foods, could continue. A new CEO could bring operational discipline to a company that has been notably lacking that department.

Given the pressures in the CPG space more broadly, Campbell’s will have a tough road to hoe. But for investors looking for a value play in the sector, and one with a 3.7% dividend yield, at least for now, CPB could fit the bill.

chk stock


Source: Shutterstock

Chesapeake Energy (CHK)

Chesapeake Energy (NYSE:CHK) is trying to recover from overspending ahead of the shale bust. Progress has been uneven. The news seems only modestly better than it was in 2016, when bankruptcy seemed a possible, if not likely, outcome. Asset sales have helped pay down some of a heavy debt load, and Chesapeake has cut costs and pulled back on its spending.

But the turnaround hasn’t moved as fast as investors would like. CHK stock has traded sideways for the last two years. Free cash flow remains negative. Debt concerns still remain under the surface, though near-term maturities are manageable.

Still, there’s an intriguing case here — particularly for investors bullish on energy. CHK’s turnaround remains a high-risk and high-reward play, as I wrote last month. And if Chesapeake can accelerate its progress, the CHK stock price should follow.


Source: Fitbit

Fitbit (FIT)

The one thing Fitbit (NYSE:FIT) has going for it is time. The smartwatch manufacturer continues to struggle. Fitbit remains unprofitable, and guidance suggests sales will drop about 7% this year. The company has ceded its market share lead to Apple, and efforts to drive sales and build out a health and wellness platform haven’t driven growth. FIT stock touched an all-time low in April and is threatening new lows after a recent selloff.

But Fitbit isn’t going bankrupt any time soon. The company still has half of its market cap in cash and investments. And as Will Healy pointed out last month, Fitbit could take a page from Garmin (NASDAQ:GRMN) – another hardware manufacturer that fell on hard times.

Competition will be tough, and it’s possible, as Healy wrote, that the Apple Watch Series 4 has permanently collapsed Fitbit’s moat. But with the business now valued at under $600 million — 0.4x revenue — a buyer could look to turn Fitbit around if the company can’t do so itself.


GoPro (GPRO)

The story at GoPro (NASDAQ:GPRO) is similar to that of Fitbit. Both hardware companies essentially new created categories. But while Fitbit was run down by competitors, the problem for GoPro appears to be that its category just isn’t big enough.

Revenue has stalled out the last few years, leading to an enormous collapse in GPRO stock. GPRO nearly touched $100 soon after its 2014 IPO; it dipped below $5 earlier this year before a modest recovery.

I’ve continued to be skeptical toward the turnaround here – but GoPro isn’t dead yet. And there has been some good news of late. Q2 earnings were better than expected. The new Hero 7 lineup may help holiday demand.

Oppenheimer rated the stock “outperform” last month with a price target of $9 — 53% upside from current levels. And with no competition, if GoPro’s category starts growing, the company, and the stock, almost certainly will follow.


Source: Shutterstock

Mattel (MAT)

Mattel (NASDAQ:MAT) has had a rough go of it in the last few years – and the last few weeks. A decline in revenue that began in 2013 accelerated in 2016 when the company lost the Star Wars license to rival Hasbro (NASDAQ:HAS). A heavy debt load led Mattel to suspend its dividend last year. MAT hit a post-crisis low earlier this year. And then a decent rally was undercut by market weakness of late: MAT has pulled back 16% in a matter of weeks.

But there’s a potential turnaround here, even if there’s a long way to go, as I wrote back in May. Mattel is cutting over $300 million in costs. Barbie sales actually have been rather solid this year. And a tie-up between Hasbro and Mattel would make some sense down the line.

First, Mattel needs to stabilize profits and start reducing debt. If it can show success on both fronts during the key holiday season, the declines of the past few years, and the past few weeks, should reverse.

Stay Clear of FTR Stock


Source: Shutterstock

Frontier Communications (FTR)

To be clear, Frontier Communications (NASDAQ:FTR) is the riskiest stock on this list. Indeed, it’s one of the riskiest stocks in the entire market. Ever since Frontier agreed to acquire a portion of the wireline business of Verizon Communications (NYSE:VZ), FTR stock has been toxic. Frontier has eliminated its dividend, executed a 1-for-15 reverse stock split, and seen its stock fall over 90% in barely two years. The debt load is nearly 5x EBITDA – and free cash flow is expected to be negative this year.

Bankruptcy is a real possibility here, as evidenced by the 17%+ yields offered by Frontier bonds at the moment. But if Frontier can somehow pull a rabbit out of its proverbial hat, the upside could be enormous. Frontier has a market cap of just $750 million – and has over $17 billion in debt. Pay down just some of that debt and shift it to equity value – at some point – and FTR stock can soar.

To get to that point, Frontier is looking to cut costs, with targeted EBITDA improvement of $500 million by 2020. That would get the company cash flow-positive – and suggests an EV/EBITDA multiple under 5x. Hit that target and move the multiple to 6x and FTR – seriously – rises by about 900%.

Again, there are big risks here. But if Frontier can hit its targets, the potential rewards are enormous.


Source: Shutterstock

Viacom (VIA, VIAB)

It appears that the long-speculated acquisition of Viacom (NASDAQ:VIA,VIAB) by CBS Corporation (NYSE:CBS) isn’t going to happen, at least for now. That leaves Viacom on its own as it tries to execute a turnaround.

And there’s potential here. Struggling networks Nickelodeon and MTV are showing a few signs of life. VIA stock is cheap (though the Class B shares, oddly, are much cheaper). The Paramount Studios business already has turned around, and in this day and age content has real value.

I wrote last month that I didn’t see Viacom stock as quite cheap enough — but there is a path here. And Viacom will have at least two years to try and find that path.

Investors Shouldn't Trust the Rally in Retail Stocks


Source: Shutterstock

The Tile Shop (TTS)

Retailer The Tile Shop (NASDAQ:TTS) is embarking on its second turnaround in the past few years. Business stalled out in 2014, while TTS dealt with a scandal as it was revealed that a key supplier was secretly controlled by the founder and CEO’s brother-in-law. With same-store sales down, and employee turnover spiking, a new CEO was brought in to clean up the company’s operations.

And it worked. TTS stock had dropped from $30 at the end of 2013 to under $10 by the beginning of 2015. In a little over two years, however, the stock doubled.

Then it stopped working. Same-store sales tanked again — and so did TTS stock, which dropped back down to $5. Founder Bob Rucker returned, and The Tile Shop changed strategies again. It decided to stop competing on price, and focus on its original strategy of high-end sales to primarily professional customers.

Decent earnings of late supported the stock — but it’s again retreating, closing near $6 on Wednesday. If Rucker is right, and there’s a base of customers willing to pay up for high-end tile, those declines will reverse. If he’s wrong, and competition from rivals like Floor & Decor (NYSE:FND) and Home Depot (NYSE:HD) is too great, new all-time lows likely are on the way.

A New Lowe’s Companies, Inc. CEO Could Be Just Enough of a Tweak


Source: Mike Mozart via Flickr (modified)

Lowe’s (LOW)

Lowe’s (NYSE:LOW) might not seem like it needs a turnaround. LOW stock hit an all-time high last month, before pulling back with the rest of the market of late. It’s been a long-term winner, too: the stock has climbed almost 500% in the last decade (albeit from housing crisis-era levels).

But Lowe’s thinks it can do better, and so does investor Bill Ackman, who’s compared LOW to one of his best investments, Canadian Pacific (NYE:CP). The company has brought in Marvin Ellison from JCPenney – who’s already restructured his company’s executive team. It’s closed its Orchard Supply concept. And it’s looking to cut costs and improve operations.

The goal is clear: to catch Home Depot. Lowe’s has been stuck in second place for years in terms of both sales growth and stock price appreciation. Performance on both fronts has been good but for both Ackman and Ellison, not good enough. If it improves, Lowe’s could see its valuation move more in line with that of HD stock and be the bigger winner going forward.

As of this writing, Vince Martin is long shares of FTD Companies. He has no positions in any other securities mentioned.

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