Update on Turnaround Situations

Near the beginning of the year, I named two stocks as potential turnaround situations that investors should do their due diligence on to see if they were suitable.  I picked both stocks because they were universally hated by everyone, yet in my opinion they were not in danger of going out of business. The catalyst for change for these companies were new managements being put in place with multi-year clean-ups ahead of them to undo on mess left by previous management.

Each stock has fared well so far this year:

What was my margin of safety on these stocks? In the case of BAC, it was the implied government guarantee and the fact the Warren Buffett committed a significant chunk of money to stock. Plus, the kicker was the universal hatred of the stock by bloggers and the Wall Street crowd driving up the pessimism surrounding the stock, and driving down the stock price. There was no way Brian Moynihan could be as dumb as Ken Lewis, who almost single-handedly destroyed the bank during the financial crises by making foolish acquisitions at exorbitant prices. For Cedar Realty, new management laid out a credible plan to correct the diworsification strategy of previous management through debt reduction, leveling out debt maturities, and divesting non-core assets. Cedar's properties consist of 80+% grocery store anchored shopping centers which provide a steady and predictable stream of income. After all, everyone has to eat. In addition, Cedar was selling at a discount to its core assets.

In my opinion, both of these stocks have further to run. I expect BAC to be in the mid 20s in 3-5 years and Cedar Realty to rise to the high single digits in 2-3 years. I would not be surprised to see Cedar acquired by another REIT once their turnaround is completed. As always, please do your own research before committing capital.