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Sound Advice: March 8, 2023

Turnarounds Rarely Turn Around

Although the majority of stocks that will prove to be profitable long-term holdings will gain ground on the basis of consistent improvement in their underlying profitability, there are always a few that are billed as promising turnaround situations.  Turnaround, in this context, typically refers to companies that may be undergoing major changes.  For some, the change may be a potentially lucrative new line of products.  For others, it may be a refocusing of efforts on an underserved market.  Or perhaps, a new management team boasting a successful record of breathing new life into firms that had been going nowhere fast.

New ideas are indeed the fuel of future growth, but more often than not the enthusiasm for whatever innovations have come to light is of greater magnitude than what probably lies ahead.  In plain English, the biggest part of these deals is the hype surrounding them, which in most cases is not justified. 

The few that eventually work out tend to be the result of a new team coming in to tidy up a messy house, sharpen the focus on products or services that are viable, and flank them with interesting variations to breathe new life into the ongoing stream of revenues.  Sometimes, these are the subjects of buyouts in which company fat is ruthlessly stripped away.  Or management passes the baton to more creative individuals who can properly assess existing strengths and develop add-ons to help pick up the company’s momentum.

The stories of these companies are often interesting, but the longstanding results of investments based on new incarnations that are worthy of substantial commitments are not good.  The rare exceptions appear when ostensible superstar managers come aboard ho-hum companies and rearrange the existing elements to maximize the value of the operation. 

One stellar example of a great turnaround was Apple, which in most of its early years had a checkered record.  The company’s early computers, the Apple II, Lisa, and Macintosh, were quite innovative, but not exactly setting its target audience on fire.  In those days, Steve Jobs was steering the ship, but in 1985 he was forced out by John Sculley and Apple’s board of directors.  For the next dozen years, Apple muddled along and made numerous mistakes.  Fast forward to 1997, Steve Jobs came back with a vengeance, focused totally on getting the company back on track.  What followed was one of the greatest turnarounds in history.

Apple was an outstanding exception, anything but typical.    

 

N. Russell Wayne, CFPÒ

Any questions?  Please contact me at nrwayne@soundasset.com

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