Investing in turnaround stocks is hard

Table of Contents

What is turnaround company?

My book about turnaround stocks

In my book “The Rules of Super Growth Stocks Investing“, I discussed the investment in turnaround stocks in:

Section 3-1, page 149, discussion of 6 industries to avoid before stock picking

How about the real world?

Bad companies with poor prospects often only get worse, such as those whose main products are almost eliminated from the market, or whose products have entered the red sea of fierce competition, but the company is not outstanding, and it is foreseeable that the business will shrink more and more. Few companies with poor prospects can be successfully transformed or revived, and the very few cases of successful revival have been remade into movies (because they are rare, movies will attract audiences).

For example, the classic case of Chrysler Automobile (ticker: STLA) turning defeat into victory is familiar to business school students. The story is charming, engaging and exciting. But the reality is cruel, and the chances of success are actually very low. As I mentioned in “The pros and cons of CEO returning, Boomerang CEO“: On average, companies with boomerang CEOs have poorer annual stock performance — less than 10.1% vs average.

Investing masters’ Views

Lynch’s taxonomy of companiess

Peter. Lin believes that each stock has a different story, and each company has different characteristics. In order to better research before investing, he divided companies into six types:

slow growers
Stalwarts
Fast growers
Cyclicals
Asset opportunities
Turnarounds

Among them, bottoming out and rebounding turnaround stocks refer to companies that have suffered heavy losses or experienced depression and are back on track, and their stocks also rebounded rapidly. While investors love the perfect play of buying low and selling high, buying and holding a loss-making company before turning profitable is not an easy task.

Peter Lynch has explained these classifications of companies: He hope investors will clearly understand which type of stocks they are investing in. Each type of stock comes with its own unique risks and rewards, which investors should take into consideration.

Buffett’s lesson learn

Buffett mentioned in his 1979 letter to shareholders: “Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price. Although a mistake, the Waumbec acquisition has not been a disaster. Certain portions of the operation are proving to be valuable additions to our decorator line (our strongest franchise) at New Bedford, and it’s possible that we may be able to run profitably on a considerably reduced scale at Manchester. However, our original rationale did not prove out.”

As for Buffett’s lessons of blood and tears, Berkshire (tickers: BRK.A and BRK.B) and Baltimore Department Store are two classic cases. There are too many related cases to enumerate. Readers who are interested in learning more can refer to his biography, so I won’t go into details here.

Easy to fall into the value trap

If investors read this article carefully, you will soon find out that turnaround stocks are the favorite of many value investors (including Buffett when he was young). The reason is simple: because turnaround stocks are usually uninterested, ordinary investors will not be interested in them. But investors who delve deeply into enterprise value will almost certainly include turnaround stocks in their observations, and even in their actual portfolio lists–just because they are so cheap that it is impossible to ignore their existence.

Because of this, if investors only believe in the quantitative numerical screening of value investing and do not take the non-quantitative factors of the enterprise into consideration, the final result is usually not good. This is also the main content of my previous article “Problems with Cigar Butt Investment“.

Closing words

As I said in “How AMD makes money? A rare case of turning defeat into victory” A rare case of turning defeat into victory in the history of enterprises”; it is not easy to turn defeat into victory in the history of enterprises. The reason why AMD (ticker: AMD) has become one of the few cases is due to many reasons. Many of these reasons are special cases that only AMD has. Too easy.

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