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: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...
Post a Comment
Read more