Discovering Turnaround Candidates
There are many types of investment methodology out there. All
of them has their own merits. I for one, personally like to
invest in turnaround stocks. What is turnaround stocks? They are
normally companies that are experiencing problems (hopefully
short-term), and a lot of people are not willing to wait for
those companies to recover.
I personally like turnaround stocks for two main reasons;
First, turnaround stocks have problems in the open. The problem
has been disclosed and our task as investor is to figure out how
much the company is worth should the problem persists or when the
problem goes away. Granted, there might be more problems
discovered along the way. But at the very least, some of the
problems has come out and the share price generally has dropped
because of that.
Secondly, expectation is low for turnaround investment. Share
price is already depressed due to known problems. The company
does not have to 'beat expectation' every time it reports
earning. All it has to do is clear out the problems that causes
its stock price to drop on the first place.
How should one find a potential turnaround candidates for
their portfolio? The one thing that I found useful is to read the
financial news. Companies that are in trouble can be easily
spotted in the news. For example, this week brought news from
Pier 1 Imports Inc. (PIR) and Doral Financial (DRL). Are these
companies in trouble? Sure. Are they turnaround candidates?
Another good source would be the list of stocks that are
touching 52 week low. Most of these lists would be companies that
are experiencing problems and hence has the potential of turning
around. For example ATI Technologies Inc. (ATYT) trade closes to
its 52 week low of $ 11.20.
What to avoid when sifting through lists of potential
turnaround investment? I would avoid company that is getting
hammered due to the delay in its financial reporting. No matter
how low the share price is, investors do not and should not
invest in companies that has some trust issues.
Once we identify our target, we can then do some analysis to
determine the fair value of the stock. There are chances that
some companies may never recover. So, we have to take that into
accounts when doing fair value calculation. Calculating fair
value is a whole brand new topic and I won't get into the details
here. But obviously, a stock will have a higher fair value if it
can recover from current problems than a stock that cannot
overcome its current problems.
Hari Wibowo manages a small finance website aiming to help new
investors getting started. Curious? You can find his other
writings at http://www.noviceinvesting.com
MORE RESOURCES updated Sat. June / 23 / 2018
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