Boost Your Portfolio by Adding 3 Turnaround Stocks
Boost Your Portfolio by Adding 3 Turnaround Stocks
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.
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.
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