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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? Possibly.

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

In The News:

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A nine-year-old boy who was left suicidal after being bullied because of his dwarfism has had "the best day of his life" as he led out an all-star rugby league team in Australia.

Italy reports second coronavirus death as infections worldwide pass 77,000
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Two people have died of the coronavirus in Italy in the space of 24 hours.

Ryanair boss accused of racism for saying terrorists are 'generally Muslim men'
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Ryanair boss Michael O'Leary has sparked outrage for suggesting would-be plane bombers are more likely to be Muslim men - and airport security should focus on "where the threat is coming from".

Giorgio Armani accuses fashion industry of 'raping' women
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Giorgio Armani has been criticised for remarks in which he accused the fashion industry of "raping" women.

Sanders tells Putin to 'stay out' of election after 'Russian help'
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Bernie Sanders has told Russian leader Vladimir Putin to "stay out of American elections".



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