Saturday, October 14, 2017

WHAT IS TURNAROUND INVESTING ?

Courtesy : internationalbanker.com



Value investing is one of the most common approaches to investment, a strategy that involves picking stocks based on their intrinsic values. Should a company’s value—as measured through a range of methods—be considered worth more than the current price of the stock, the company is likely to be deemed as being undervalued and therefore ripe for a recovery. Such stocks are highly sought after by value investors, of whom some are the most respected investors in the industry, such as Warren Buffett and Seth Klarman.
One of the main facets of value investing is turnaround investing. This involves taking a position in a stock that has fallen out of favour—often due to bad news initially associated with the company—and is therefore not perceived by the majority of investors to be a worthwhile consideration. Profound financial and operational issues are likely to have severely dragged down the company’s stock price and its business model. A turnaround stock, however, will continue to have a higher intrinsic value than asserted by the majority. This means that it remains an attractive investment option as its stock price is likely to recover—or “turnaround”—in order to reflect this true value.
Companies that are in need of a turnaround have often suffered a consistent decline in their financial results, which in turn has resulted in a loss of investor confidence and ultimately a collapse in their share prices, as positions are sold en masse. This leads to companies trading at heavy discounts that eventually become ignored by the majority—but noticed by value investors. If the company announces efforts to turn the company around, it is likely that improved financial performance will follow. Such an announcement, therefore, often results in an increased stock price. However, it is also the case that management realises that positive change doesn’t transpire as quickly as intended, if at all, which is why it is worth waiting to see if such pronouncements translate into visible, sustainable improvement in the company’s underlying fundamentals. If the factors that caused the company’s initial demise appear to be duly addressed, then an investor can be more assured that a successful turnaround is imminent.
Indeed, a turnaround often involves preventing the company’s deterioration by implementing stabilisation measures, through cutting costs, selling non-vital assets, divestment or even changing the entire focus of the business or the way it markets its products. It may even involve filing for bankruptcy in order to alleviate some of its debt burden. Many US coal companies, for example, have filed for bankruptcy to eliminate much of the debt they amassed when coal prices were at all-time highs, at the beginning of the decade. Whether they are successful in posting comprehensive recoveries, however, remains to be seen.

Investing in turnaround stocks can often be a risky strategy, given that not all companies that implement recovery measures will rebound. Indeed, many will continue on an inexorable decline. Many companies have long-term management woes, issues with product marketing, are in cyclical decline, or are facing legal action. This means that repairing the company’s balance sheet is only one measure required for the stock to rebound. Management may have to be overhauled, costs may need to be reduced, new products may need to be developed, and lawsuits may require settlement. Moreover, investing in turnaround stocks invariably involves going against the grain and being a contrarian in relation to the majority of the investment crowd. Investors feel reassured that they are making the right decision when others are doing the same. With turnaround stocks, however, the majority ignore the true value and remain focused on news associated with the company’s fall from grace. Therefore, investing against the consensus view generally requires a degree of independence, as well as discipline in staying true to the company’s valuation metrics.

There are a number of ways to measure a stock’s valuation, including the price-to-earnings ratio (P/E) and the price-to-book-value ratio (P/BV), which involve examining the company’s earnings and debt levels and comparing them to its stock price. Asset-based valuation is also a popular method to determine intrinsic value, which essentially involves calculating the difference between a company’s assets and its liabilities. Different parameters provide different valuations, which makes it wise for the investor to calculate true value using a range of methods.
For those willing to perform a more detailed analysis of the company’s value, investment opportunities can arise as the true value eventually causes the stock price to rebound. This may require obtaining information on the target company that is difficult to come by. The benefit that arises from this method, however, is that because the stock price has already fallen substantially, any further “bad news” can often be deemed as having been “priced into” the stock value with the assumption that the majority of investors have effectively written it off.

An example of the emergence of turnaround stocks can be seen in the widespread collapse of global equity markets during the global financial crisis of 2007-09. As investors panicked, stocks were sold across the board. This resulted in many stocks—and indeed, entire sectors—falling out of favour with the main investment crowd. As such, several companies with strong fundamentals presented investors with attractive buying opportunities, given that their true values remained relatively strong. Given that global equities have largely been suffering from a bear market in 2016’s first quarter, understanding the turnaround concept remains just as important today for the value investor looking to unearth hidden gems. 

It is also useful to have an exit strategy with potential turnaround stocks, given the risk posed to the investor of the stock continuing to decline. This makes exiting such a position a much more subjective process as compared with other stocks. Therefore, it remains important to continue monitoring the measures taken by the company to improve its business, how upbeat and optimistic the management has remained, and the price of the stock in comparison to its industry rivals.

 Turnaround investing may lose investors a sizable amount of capital if the company cannot complete the intended turnaround. However, if it works, significant upside will emerge as the stock rebounds.


52 comments :

  1. Websol.
    Promoter shareholding has decreased while FPIs increased.
    How to interpret this? Also, do you think solar sector as whole is doing good?

    ReplyDelete
    Replies
    1. Promoter holding on December 2016 was 60,69,422 shares which is now 68,49,422 shares in Websol

      Delete
  2. Hello Sir, Nice Article, Could you advise to still invested in IL&FS engineering , I am having huge loss on this stock. Should i keep invested or exit from current level?

    ReplyDelete
    Replies
    1. Please go through the comment portion of below post . During November 2015 , suggested to shift if some better opportunities exist.

      https://value-picks.blogspot.in/2015/11/result-update-il-engineering.html#comment-form

      Delete
  3. Thank you for sharing good thought. Wish you and your family happy Diwali sir.

    ReplyDelete
  4. Dear VP Ji

    Nice to see you back in action. I wanted your current opinion on Valiant Communication. I have been holding this for 2 years but the stock has moved nowhere. The only conviction to hold was that it had good order book but had poor execution due to lack of working capital but the promise has not been backed by performance. It is also surprising that the company's website has no section for investors and there is not much transparent management discussion. Does it make sense to continue to hold

    ReplyDelete
    Replies
    1. Dear .

      At the time of suggesting that stock ,I clearly mentioned to which type of investor's that stock suits.

      Delete
  5. Sir, your views on Kriti nutrients and Dyncons systems?

    ReplyDelete
  6. Hello sir
    What is your view regarding modison metal and raunaq auto
    Thanks a lot for your perennial guidance.

    ReplyDelete
  7. india securities is delisted one. is it safe to invest ??

    ReplyDelete
    Replies
    1. Where I mentioned about India Securities ? , pls indicate.

      Delete
  8. Is it directed at Ess dee aluminium sir ?

    ReplyDelete
  9. Welcome back VP sir. Happy Dipavali in advance.

    ReplyDelete
  10. Sir
    Thank you so much for this article. Best example of turn around company is Ramky infra.

    ReplyDelete
  11. Please your view upon Gufic bio Ashapura mine and Jai corp.

    ReplyDelete
    Replies
    1. Tracking only Ashapura , for those ready to loose even capital.

      Delete
  12. VP Sir,
    Welcome back sir and hoping all good with you.

    Sir any view on Kesar Petroproducts?

    ReplyDelete
  13. Dear VP, Any views about ALUFLUORIDES? Are you tracking by any chance?

    ReplyDelete
  14. sir what is your view in Navin flourine international limited? is it worth accumulating at this stage?

    ReplyDelete
  15. Hi Sirji, Please share your views on RKEC projects.

    ReplyDelete
    Replies
    1. Seems a good one , but price appreciated substantially post listing in a short period of time.

      Delete
  16. Dear vp ji
    Advance happy and colourful diwali to you n your family.
    Thanks for lighting,enlightening us, using your (foreseen and clear vision) kind rays.

    ReplyDelete
  17. Hi Sir,
    Please give your view on NCL industries and Pokarna if you are tracking them.

    ReplyDelete
    Replies
    1. Not tracking Pokarna

      NCL we discussed around Rs.85

      Delete
  18. Your view on PNB housing

    ReplyDelete
  19. Hi Sir, Wishing You and Your Family A Very Happy, Healthy and Prosperous Diwali.

    Regards,
    Venu.

    ReplyDelete
  20. DhruvOctober 12, 2017 at 9:56 AM
    Respected Sir,

    Kindly share your view on share India securities.
    Thanks

    Reply
    Replies

    VALUEPICKOctober 14, 2017 at 3:10 PM
    Seems reasonably valued compared with peers.

    Discl: Holding this stock , hence view may be biased

    ReplyDelete
    Replies
    1. India securities and share India securities are different companies.

      Delete
  21. Wishing you and your family a very Happy and Prosperous Diwali

    ReplyDelete
  22. Dear sir.. Happy diwali.. Just wantes to know that do u provide any kind of paid services.

    ReplyDelete
  23. Thank you for this good article.... will TV Vision fall in Turnaround investing... Not sure what is happening with this stock but has fallen around 50%. Any insights on this stock sir.

    ReplyDelete
  24. Hi VP Sir,

    Happy Diwali...

    Could you please let me know if you track karur Vysya Bank, Karnataka Bank and IDFC Bank. If Yes, then Please share your reviews.

    ReplyDelete
  25. Happy Diwali.sir your view on Dion global

    ReplyDelete
  26. HAPPY DIWALI
    Bought MULTIBASE INDIA at 250 after reading your blog
    Now at 500 What to do

    ReplyDelete
  27. Dear VP Sir Why there is a sudden jump in IFB Agro share price? Within last 2 trading days the share went up by 40%. Is there any specific reason, Sir.

    ReplyDelete
  28. Wish you and your family a very happy Diwali.God bless you and your family-avinash

    ReplyDelete
  29. yr view on SHILPI CABLE please !

    ReplyDelete
  30. Dear Sir,

    Can you please suggest your views on 8KMiles Software and Kellton Tech Solutions? Both companies are in Technology sector however they have niche businesses; 8KMiles in Cloud Solutions and Services and Kellton in the Mobile Apps Solutions and services and both have a good quarter on quarter performance, however have been declining. Are these good for investment from long term? Please share your views if you have studied any of them?
    Also if you would share your views on not so hidden company Tata Elxsi in the similar technology sector?

    ReplyDelete
  31. Hello Sir,
    What is your opinion on India Glycols ?

    ReplyDelete
  32. Sir,

    Asian oilfields promoter holding has increased in last quarter , result was good in my opinion but stock price seems to be going nowhere, do you think it has enough potential to go up in medium term or is there any underlying problem that I am failing to understand ?

    Please reply.

    ReplyDelete
  33. Sir, are you tracking high ground enterprises?

    THANKS IN ADVANCE

    ReplyDelete
  34. Sir, any comments on pennar engineering building systen

    ReplyDelete
  35. Dear sir,

    Wishing u very happy new year,

    i have invested in v2retail at rs 30.now share price increased substantially.what to do.whether to hold or sell.please suggest.

    Very much thankful for such a nice suggestion

    ReplyDelete

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