Skip to main content

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

Comments

Post a Comment

Popular posts from this blog

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more

Sound Advice: May 31, 2023

High Yields, Yes!  But There Are Risks Now that failure to get much done in Washington seems to be the bottom line for lots of talk, but little action, it’s hard not to wonder whether we’re missing something.  Yes, the Federal Reserve Board has aggressively raised interest rates in the hope of putting a damper on excessively high inflation, but one would think that there might be some good news as a result of these efforts. The hoped-for result is that inflation is indeed moderating.  Also of importance, though, is the sharp improvement in interest rates on fixed-income investments, usually a.k.a. bonds.  For much of the past decade or more, interest rates have languished at or near historical lows, which created considerable shortfalls for folks living on fixed incomes. Thanks to the Fed’s hikes, the returns on bonds and the like are beginning to be of interest.  But . . . and that’s a big but . . . there are risks involved. For short-term investing at ...
Post a Comment
Read more