Monday, March 11, 2013

An Update on My Turnaround Stocks

First, a warning. Turnaround investing isn't for everyone. Only do it if you have a strong stomach, and can take the volatility and potential losses in pursuit of alpha. Some of these situations are dogs that will always remain dogs, but occasionally you'll hit a home run.

Around the beginning of 2012, I initiated a couple of "turnaround" positions in stocks that seemed cheap based upon their assets and earning potential-- Bank of America and Cedar Realty Trust. They performed well throughout the year. Then near the end of 2012 I purchased a couple of more turnarounds. The results are below:

Bank of America - this one was a no-brainer--- the bank everyone loves to hate.... what could be better to drive down the price to ridiculously cheap levels. The bank was essentially backstopped by the US Government so there was no chance of it going out of business, and there was no way Brian Moynihan could could be as dumb and reckless with shareholder capital as Ken Lewis. This one is going into the $20s in the next 3 years even if the yield curve steepens.

Cedar Realty Trust - this was another no-brainer that I should have picked up for $3.50 a share instead of $4.25 (shame on me) when it was clearly selling below the value of its assets. New CEO Bruce Schanzer has completed divesting the company of non-core assets accumulated by previous management, and is now working to strengthen the balance sheet, and put the company back on the path to FFO growth before increasing its dividend. Wouldn't surprise me to see this one trading trading in th $8-9 range in a couple of years, or to be merged into a larger REIT.

Hewlett Package - another no-brainer..... after 10+ years of stupid management dramatically overpaying for acquisitions on the hope and a prayer that they would reignite growth in the company, I decided to jump into this one when they announced their $8.8B dollar write down of the Automony acquisition. I chalk the writedown up to the company failing to do its due diligence. Shame on them, but an opportunity for investors. I bought this stock on the over-reaction to the writedown and in the belief that PCs and printers are still a profitable albeit under-appreciated business. I also bought on the faith that Meg Whitman would bring some much needed stability and strategic direction to the company. I expect this stock to be back in the low 30s in 2 - 3 years.

Chesapeake Energy - this is the riskiest stock of the turnarounds. It is largely dependent on the price of natural gas to help cure its debt problems. Good news is that lightning rod CEO Aubrey McClendon is retiring, and with a more independent board of directors, hopefully, they will not let the new CEO use the company as his own personal piggy bank. I expect this stock to be in the low 30s sometime in the next 3 years, but it could also fall to the single digits should the price of natural gas fall.

Two that Got Away - opportunities that I missed this past year were AIG and MBIA. Some financials are very difficult to evaluate, but it was clear AIG was another situation backstopped by the Feds so it wasn't going to fail.

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