Bruce Kaser
Bruce Kaser, editor of the Cabot Turnaround Letter, Lexington, Massachusetts. He has more than 25 years of investing experience including overseeing value mutual funds for major fund-management companies. CabotWealth.com
Top investment manager Bruce Kaser, CFA, doesn’t get excited about investing in artificial intelligence or chasing red-hot tech stocks. He’d rather pick through the stock market’s bargain bin for beat-up companies. In fact, the more damaged a company is due to earnings shortfalls, heavy debts, problematic acquisitions or poor management, the more intrigued Kaser gets. Reason: These stocks sell for dirt-cheap prices even though some still may have strong underlying businesses and overlooked catalysts for growth.
While it has paid to follow the herd over the past year, market valuations are stretched, selling at 21 times next year’s earnings, and fast-growing stocks are overvalued. Also, today’s steady economic conditions and impending interest rate cuts are favorable for Kaser’s style of finding out-of-favor investments. Expectations for these stocks are so low that it doesn’t take much good news to push up their prices. Bottom Line Personal asked Kaser how he identifies the gems and which stocks have the most promise…
The biggest risk to investing in turnarounds is getting caught in a “value trap,” a struggling business facing a complicated recovery with a depressed stock price that can languish for years or even slide further. How I separate the ones that can rebound from those that won’t…
Focus on consumer and industrial companies. These sectors are the easiest to evaluate and offer the highest success rates for turnarounds.
Look for well-known products and brands. Few customers will switch to a competing brand as long as the quality of goods stays the same. Customer loyalty is essential for a turnaround company to maintain a steady level of revenue needed to execute its recovery plan.
Check that the stock price really has bottomed out. One clue: After a company issues a poor quarterly earnings report or lackluster earnings forecasts, the stock price barely falls. This tells me that investors who are thinking of selling have abandoned the stock.
Look for catalysts for growth. My favorite is new leadership. When a company replaces its CEO or members of its board of directors, changes are introduced to improve profitability. I also like to see a spin-off announcement or sales of ancillary businesses—this allows management to raise cash and refocus on its core business.
Track operational improvements, especially improving cash flow. The stronger a company’s cash flow, the greater its chances are for recovery because it has the resources to fund its new initiatives, pay down debt, maintain its credit rating and avoid default.
The following stocks have rock-bottom prices and big rebound potential…
Advance Auto Parts (AAP), one of the largest retailers of aftermarket parts, has more than 5,000 locations. The stock price has fallen about 70% below its five-year high* after a decade-long acquisition spree left AAP an operational mess. It has been a serial underperformer versus rivals AutoZone and O’Reilly Automotive, whose stock prices have tripled in the past five years. Last year, Advance Auto Parts’ credit rating was downgraded to junk level and the company slashed its dividend by 80%.
Turnaround potential: Advanced Auto Parts won’t require a game-changing product or service for its stock price to catch up to its peers. Improvement hinges on better customer service, inventory management and the ability to get the right part to a customer anywhere in the US within a day. In September 2023, Shane O’Kelly became the new CEO. He served as CEO of HD Supply, a subsidiary of The Home Depot, which delivers supplies to 250,000 commercial facilities. He plans to simplify the business by selling the company’s Canadian operations and original-equipment distributor WorldPac, and he has raised wages for front-line employees to improve customer service. Advance Auto Parts expects to generate $250 million in free cash flow in 2024 versus $44 million last year. Recent yield: 1.33%. Recent share price: $75.42.
Baxter International (BAX) manufactures medical instruments and supplies. For decades, it was a health-care powerhouse in 100 countries, but it suffered operational setbacks in recent years. Business dried up during the COVID-19 pandemic due to supply-chain slowdowns and patients putting off routine procedures. In 2021, Baxter overpaid to acquire Hillrom, which makes high-tech hospital beds and patient-monitoring devices, for nearly $11 billion. Last year, the success of new obesity drugs such as Ozempic cast a pall over the long-term profit potential for Baxter’s kidney-dialysis and diabetes-care businesses. Investors see Baxter as an overleveraged giant with little revenue growth. The stock price is less than half of its five-year high.
Turnaround potential: Cooling inflation and post-COVID normalization of hospital budgets should allow Baxter to improve earnings growth in coming years. It is addressing spiraling debt through a $4 billion sale of its biopharma solutions business and plans to spin off its kidney-care business in the second half of 2024. Baxter’s prospects should improve next year as the company negotiates long-term contracts with hospitals. Recent yield: 2.89%. Recent share price: $40.64.
CNH Industrial (CNHI). This manufacturer of agricultural and construction machinery has a following among commercial farmers. But the company’s confusing corporate history has kept it out of most investors’ portfolios. For years, CNH was owned by Fiat and was lumped in with the Italian automaker’s bus and truck business. CNH stock has fallen by about 35% from its all-time high due to weakening global demand for crops and delayed new farm equipment purchases by farmers. It also has been held back by sluggish earnings from its on-highway division, which produced commercial vehicles and powertrain parts.
Turnaround potential: CNH can compete as a profitable pure-play farm-and-construction-equipment manufacturer after spinning off its on-highway business as a separate publicly traded company. This allows CNH to avoid spending billions to prepare vehicles for new emissions standards. CNH also acquired Raven Industries, a leader in autonomous agriculture technology. CNH will take advantage of a new spending cycle among farmers as they upgrade their farm equipment. Recent yield: 4.12%. Recent share price: $11.73.
Newell Brands (NWL). This consumer-goods conglomerate’s portfolio of iconic brands includes Elmer’s glue, Graco baby carriers, Mr. Coffee, Rubbermaid and Yankee Candle. Products are mostly sold through brick-and-mortar stores, whose sales are declining due to e-commerce. That has led to years of slow earnings growth, negative free cash flow over the past year and a debt load of $6.1 billion—double the size of the company’s own market capitalization. The stock price, which has fallen about 35% in the past year, is trading at 2009 levels. And the SEC charged former Newell Brands and its former CEO, Michael Polk, last year with misleading investors about company sales growth (they settled the charges and paid civil penalties).
Turnaround potential: Last year, Newell appointed former CFO Chris Peterson, a former retail executive with Ralph Lauren and Procter & Gamble, as CEO and replaced several members of the board of directors. Peterson is overhauling the company’s processes to restore efficiency and refocusing on products with the highest revenue growth potential. In the past year, cash flow at Newell Brands increased by $1.2 billion year over year and corporate debt was reduced by about $500 million. Recent yield: 3.59%. Recent share price: $8.05.
