Boost Your Portfolio by Adding 3 Turnaround Stocks

 Boost Your Portfolio by Adding 3 Turnaround Stocks 

By Timothy Melvin

http://www.investopedia.com

Legendary investor Peter Lynch divides the market into six types of stocks: the slow growers, the stalwarts, the fast growers, the cyclicals, the asset plays, and the turnaround stocks. In his book, "One Up On Wall Street," Peter Lynch describes turnarounds as those companies that "have been battered, depressed and often can barely drag themselves into Chapter 11.” But when these companies successfully execute a turnaround, the gains can be enormous. Keep in mind, though, that many of these turnarounds will never actually turn, so investors should own several and not just bet on one or two. Lynch maintains that out of all types of investing, buying turnarounds is the approach that is least dependent on short-term market moves. Successful turnarounds can go up in a bad market and unsuccessful ones can collapse even during a raging bull market.

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One of the better ways to for individual investors to search for turnarounds is to use the Value Line research service. In each week's issue, Value Line publishes a list of stocks that it predicts will have the highest 3-to-5 year appreciation potential , Value Line is expensive at over $500 a year, but the good news is that almost every public library in the United States offers access to Value Line in the branch. Some libraries even offer it to library members online. Those who want to subscribe can go to www.valueline.com. The list is usually comprised of companies that have seen dramatic price declines and are wildly out of favor with the investing community at that moment. For savvy investors, this is a shopping list of turnaround opportunities. In this article, we'll discuss a few strong turnaround prospects.

Building a Potential Turnaround

Hovnanian Enterprises Inc (HOV) is a good example of a potential turnaround. Hovnanian is a home builder that builds homes across all segments of the housing market and also provides mortgage and title insurance services. They probably should have followed some of their competitors into bankruptcy during the credit crisis to shed debt and emerge with a stronger balance sheet. Instead, they stayed the course and are trying to earn their way out of the debt burden. Home building is steadily improving across the country. Hovnanian also has substantial amount of land available to sell to meet dent payments including paying off $238 million due between now in January of 2016.

 The company could have a tailwind that allows them to recover as home building is slowly but steadily improving right now. The returns will be enormous if they are successful, but with the high debt load, management has very little margin of error. According to recent filings with the SEC, at least one insider has a great deal of confidence that Hovnanian can survive and was increasing his stake in the company in late October 2015.

A Question of When and Not If

Layne Christensen Co (LAYN), a water management, construction and drilling company, has seen short-term results hampered by weakness in oil prices and the sustained slowdown in municipal spending. While Wall Street is focusing on short-term results, this 130-year old company is playing the long game. The United States is facing severe water shortage and drought problems in certain regions. Also, the nation's water infrastructure is badly aging and in need of massive spending for maintenance and upgrades. There is no question that Layne is well placed to capitalize on these these trends. The company helps municipalities source water supplies and build wells, pumping stations and treatment facilities. On the infrastructure side, Layne is one of the largest providers of sanitary and storm water rehabilitation solutions. Much water infrastructure spending in the United States has been delayed due to lack of political will and the very slow pace of economic recovery, but the spending is inevitable.

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Insiders seem to be quite confident that the company will see a much higher stock price over time. The Chairman, CEO and CFO as well as one director have been large buyers of the stock the past few months. According to recent SEC filings, these insiders have snapped up tens of thousands of shares of the company. Noted value Investor Mario Gabelli has also been aggressively buying the shares and now owns more than 10% of the company according to a recent 13D filing with the SEC.

Brewing Up a Turnaround

Wall Street has been down on shares of Craft Brewing Alliance Incorporated (BREW) in recent months due to higher costs and an increasingly crowded market for craft brewing. The company has responded by forming partnerships with Appalachian Mountain Brewery in North Carolina and Cisco Brewers in New England to improve sales and hopefully profits. Craft Brewing makes several a very popular craft beers including Kona, Widmer Brothers, Redhook, Omission and Square Mile--all have done very well in a crowded market. Craft Brewing also has access to Anheuser-Busch InBev's (BUD) distribution network, which gives them a huge competitive advantage over other craft beer companies. Anheuser-Busch InBev owns more than 30% of the brewery and corporate insiders own more than 10% so everyone involved had a substantial amount of skin in the game and are motivated to see profits and the stock price go much higher in the future. The short term may be a little bumpy for this stock, but the long term is very bright if they successfully execute their turnaround and growth plans.

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The Bottom Line

Buying companies that are undergoing a turnaround can carry high risks but the rewards can be spectacular when a turnaround candidate is successful.
*The author held shares in Layne Christensen Company at the time of writing.