Investing in turnaround stocks
Created on 07 Jun 2019
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Updated on 30 Sep 2020
Every business, whether it is big or small, follows a business cycle consisting of growth, maturity, and decline phases. The company in the growth phase performs well, which makes it stock prices higher, whereas the company in decline phase always have stocks dipping down in price. So, when a company reaches the decline phase, then, there are just two chances- either it will become bankrupt or it will turnaround itself and bounce back. The turnaround shares refer to those companies which are underperforming currently but are expected to rebound. Smart analysis of such stocks that are near the bottom can fetch ample gains to investors if they bounce. Such stocks are usually not preferred by the stock market for some reason or the other.
Turnaround stocks are maximum potential investment opportunities and are often referred to as recovery stocks as well. These stocks narrate the stories of corporate transformations, of those which have almost hit the shrink and have still managed to bounce back.
Investing in turnaround stocks can make you mint millions, but if you haven’t done the right analysis of such stocks, then there is a high possibility of your money getting doomed. Such companies need to be analysed for the historical growth rate, growth quality, valuation, debts, and profitability in the past.
Past instances have shown that the turnaround stocks seldom bounce back because the talent and energies of employees are better consumed in well-doing businesses than poorly doing ones. Usually, the investment gurus such as Warren Buffet, look for an attractive balance sheet in poorly performing stocks. Warren Buffet and many investors of his calibre are eagerly looking for turnaround stock, and such investors would want to lay their hands on as many such stocks as possible.
Turnaround situation and recovery situation
A turnaround situation is usually with a company which has not been able to produce expected returns for at least a decade or so.Recovery situation refers to a company with a long and successful track record but has fallen since past one or two years in not performing as expected. Such companies are believed to be in recovery mode and have better chances of bouncing back soon. So, serious investors are not just looking for turnaround stocks but are equally interested in recovery stocks as well.
Example of a turnaround stock
One such example of a turnaround stock is that of John Chen, who is the CEO of Blackberry. Long back, he had invested in a dead business in a company called Sybase. He reinvented the company and held it from 1998 to 2010. In 2010, he sold off the company to SAP. Under John Chen’s supervision, the company reinvented itself from a slow-growing company to a well-performing innovative machine. So, let's take a look at what is it that successful investors like John Chen look for in a company.
What to see while investing in turnaround stocks:
1. Balance Sheet: As an investor, the very first thing that you need to do is to check if the balance sheet reflects that the company can pay its bills or not. If it is not able to pay its bills, it means that it is heading towards bankruptcy. Example: A US retail chain, by the name Sears Canada, filed for bankruptcy as it invested a lot of money in the online distribution network. Later, it was not able to even pay its bills, which finally made it bankrupt.
2. Identify the game changer: The only thing such companies require is one strategy or one service or one product that can change the game. One such popular example of a turnaround product for a company is ‘iPhone.’ Before the iPhone was launched, Apples’ stocks weren’t doing great. Now, the stocks have shot up to 800% gain, so imagine the kind of money, the investors would have made if they had invested in Apple before the launch of the iPhone.
So at any point in time, you can see plenty of public limited or private ventures struggling to make their way through. But, amongst them, you will always find a handful that will turn themselves around. Though it involves a great deal of risk, the rewards are also high.
If you want to know, how to pick good stocks-Stock Selector
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