{"id":22829,"date":"2013-07-19T00:00:00","date_gmt":"2013-07-18T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/peter-lynch-approach-of-investing-in-turnaround-companies\/"},"modified":"2013-07-19T00:00:00","modified_gmt":"2013-07-18T18:30:00","slug":"peter-lynch-approach-of-investing-in-turnaround-companies","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/peter-lynch-approach-of-investing-in-turnaround-companies\/","title":{"rendered":"Peter Lynch Style: Do &#8216;Turnarounds&#8217; really take a U-Turn?"},"content":{"rendered":"<h3 style=\"text-align:justify\"><strong>\u201cEagles fly against the wind and not with it.\u201d &#8211; Anonymous<\/strong><\/h3>\n<p style=\"text-align:justify\">Everyone wants to fly against the wind but very few of us have really got the courage to do it. Most of us are like the birds that fly in flocks to make their journey easier. Anyone who likes to fly against the wind in the stock markets, would set eyes on \u2018turnarounds\u2019. Turnaround companies are usually preferred by high risk takers with a view to generate maximum returns at the cost of highest risk. Investing in such companies is quite risky but occasional huge success has made this category very attractive for a section of contrarian investors.<\/p>\n<h3 style=\"text-align:justify\">What is Turnaround?<\/h3>\n<p style=\"text-align:justify\">According to <a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/basics-of-investing\/peter-lynch-principles-of-safe-stock-investing\/\"><\/a><a title=\"Peter Lynch\" target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><u>Peter Lynch<\/u><\/span><\/a>, \u2018turnaround companies are battered, depressed, and often can barely drag themselves into bankruptcy &amp; they are no growers\u2019. He breaks them down further into sub-categories:<\/p>\n<ul>\n<li>\n<p style=\"text-align:justify\">\u2018The bail us out\u2019 kind of turnaround.<\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">\u2018The little problem we didn\u2019t anticipate\u2019 kind of turnaround companies, where the problems are far worse than originally thought.<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">\u2018The perfectly good company inside a bankrupt company\u2019 kind of turnaround.<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">\u2018The restructuring to maximize shareholder values\u2019 kind of turnaround. Restructuring is a company\u2019s way of ridding itself of certain unprofitable subsidiaries it should never have acquired in the first place. Companies bought these companies to diversify their operations. Peter Lynch calls this as \u2018diversification\u2019.<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">The <\/span><a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/basics-of-investing\/peter-lynch-style-of-getting-rich-playing-with-assets\/\"><\/a><a title=\"Asset Play\" target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><span style=\"text-align:justify\"><u>Asset Play<\/u><\/span><\/span><\/a><span style=\"text-align:justify\">&#8211; Companies having something of value that <\/span><span style=\"text-align:justify\">stock market<\/span><span style=\"text-align:justify\">\u00a0hasn&#8217;t\u00a0fully considered. It could be cash, patents or acres of land possessed by the company.\u00a0<\/span><\/p>\n<\/li>\n<\/ul>\n<h3 style=\"text-align:justify\"><span style=\"text-align:justify\">Lynch has got Apple!\u00a0<\/span><\/h3>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Peter Lynch in his book \u2018One up on the Wall Street\u2019 describes how he bought Apple stock:<\/span><\/p>\n<p style=\"text-align:justify\">\u201cAfter Apple computer fell apart and the stock dropped from $ 60 to $ 15, I wondered if the company would ever recover from its di?culties, and whether I should consider it as a turnaround. Apple\u2019s new Lisa, its entry into the lucrative business market, had been a total failure. But when my wife told me that she and the children needed a second Apple for the house, and when the Fidelity systems manager told me that Fidelity was buying 60 new Macintoshes at once, then I just learned that (a) Apple still was popular in the home market, and (b) it was making new inroads in the business market. I bought a million shares and I haven\u2019t regretted it.\u201d<\/p>\n<p style=\"text-align:justify\">In Nov 1997, Apple was trading at $ 4.67 per share. In July 2013, it is trading at $ 430 or about 92 times the share price. Imagine the gains, however, holding these kind of stocks, is easier said than done.<\/p>\n<h3 style=\"text-align:justify\">Finding your own Apple!<\/h3>\n<p style=\"text-align:justify\"><a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/indianstocks\/mid-cap\/healthcare\/pharmaceuticals-drugs\/wockhardt\/company-info#decision-maker-anchor-link\"><\/a><a target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><u>Wockhardt<\/u><\/span><\/a> can be termed as a quite recent example of turnaround success. Wockhardt went through turbulent times in 2008, with the onset of economic slowdown. The Company had Rs. 3,800 Cr. debt on its balance sheet and a slew of assets acquired during the global boom period. The huge debt, liquidity constraints and adverse market conditions forced Wockhardt to approach the lenders for Corporate Debt Restructuring (<a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/current-events-news\/kingfisher-and-suzlon-go-the-cdr-way-know-what-exactly-is-corporate-debt-restructuring\/\"><\/a><a title=\"Corporate Debt Structuring\" target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><u>CDR)<\/u><\/span><\/a>.<\/p>\n<p style=\"text-align:justify\">The company\u2019s sale of nutrition business to Danone, led to lowering of debt on its books with renewed focus on its core operations and streamlining of troubled business areas improved the company\u2019s financials considerably. Today, Wockhardt ranks among the top 10 players in the Indian Pharmaceutical industry.<\/p>\n<p style=\"text-align:justify\">If you had invested in the stock of Wockhardt in April 2010 (Rs. 139.50), you would have earned a magnificent return of 149% (CAGR) in 3 years! However, the same stock fell from Rs. 2,124 in March 2013 to Rs. 908 in July 2013. So, remember, it can be quite a tough roller coaster ride!<\/p>\n<h3 style=\"text-align:justify\">Turnaround in Portfolio:<\/h3>\n<p style=\"text-align:justify\">\u201cSome people ascribe my success to my having specialized in growth stocks. But that\u2019s only partly accurate. I never put more than 30-40% of my fund\u2019s assets into growth stocks. The rest I spread out among the other categories. Normally I keep about 10-20% or so in the stalwarts, another 10-20% or so in the <a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/learn\/peter-lynch-approach-of-investing-in-cyclical-stocks\/\"><\/a><a title=\"cyclicals\" target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><u>cyclicals<\/u><\/span><\/a>, and the rest in the turnarounds.\u201d<\/p>\n<p style=\"text-align:justify\">What\u2019s so special about these turnarounds that made Lynch invest in them when he himself called them \u2018potential fatalities\u2019?<\/p>\n<p style=\"text-align:justify\">They have the following positive characteristics which makes them fascinating:<\/p>\n<ul>\n<li>\n<p style=\"text-align:justify\">Performance is not in sync with general market conditions.<\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Asymmetric returns can be expected from them as when they turn profitable they make up for the lost ground quickly.\u00a0<\/span><\/p>\n<\/li>\n<\/ul>\n<h3 style=\"text-align:justify\"><span style=\"text-align:justify\">Buying potential Turnarounds:<\/span><\/h3>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">\u201cBottom ?shing is a popular investor pastime, but it\u2019s usually the ?sherman who gets hooked. Trying to catch the bottom on a falling stock is like trying to catch a falling knife. It&#8217;s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.\u201d<\/span><\/p>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Thus, while looking for investing in potential turnarounds, some points to be considered are:<\/span><\/p>\n<ul>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">How much cash and debt does the company have?\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">If it\u2019s bankrupt already, then what\u2019s left for the shareholders?\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">What is the company\u2019s strategy? Has of the company sold off unpro?table divisions?<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Will this make a big di?erence in earnings?\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Is business coming back?\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Are costs being cut? If yes, what will be their effect?<\/span><\/p>\n<\/li>\n<\/ul>\n<h3 style=\"text-align:justify\"><span style=\"text-align:justify\">Time to say Sayonara!<\/span><\/h3>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">One should never sell a stock till the story remains intact even if the stock has risen or fallen since purchase.\u00a0<\/span><\/p>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">However, when the decision to exit has been made, following signs should be looked at:<\/span><\/p>\n<ul>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Debt has increased in consecutive quarters.\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">Inventories are rising at twice the rate of sales growth.\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">The <\/span><a target=\"_blank\" rel=\"noopener noreferrer\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/basics-of-investing\/understanding-pe-ratio-and-its-importance\/\"><\/a><a title=\"P\/E\" target=\"_blank\" rel=\"noopener\"><span style=\"color:#0000ff\"><span style=\"text-align:justify\"><u>P\/E<\/u><\/span><\/span><\/a><span style=\"text-align:justify\"> is inflated relative to earnings prospects.\u00a0<\/span><\/p>\n<\/li>\n<li>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\">The company\u2019 s strongest division sells 50 % of its output to single customer, who itself is su?ering from sales slowdown.<\/span><\/p>\n<\/li>\n<\/ul>\n<p style=\"text-align:justify\"><span style=\"text-align:justify\"><strong>Finally, \u2018Turnaround\u2019 is high-gain-high-risk category.<\/strong><\/span><span style=\"text-align:justify\"> The higher the potential upside, the greater the potential downside, and if a troubled old turnaround has a relapse, the downside can be losing all your money. This is something one should never ignore, when considering turnarounds. A great deal of due diligence and patience is required to identify companies on the precipice of a successful turnaround, and even then the surety of it happening is uncertain. Thus, after weighing the pros and cons, if you still have the courage and are willing to go for a risky investment, then try your hands out at Turnarounds!<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Explore turnaround stocks, peter lynch insights &#038; examples like apple, wockhardt\u2014learn risks, rewards &#038; strategies for contrarian investors in india.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_is2025_no_summary":false,"footnotes":""},"categories":[1157,1144],"tags":[],"class_list":["post-22829","post","type-post","status-publish","format-standard","hentry","category-advanced-reading","category-sensible-investing"],"_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22829","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=22829"}],"version-history":[{"count":2,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22829\/revisions"}],"predecessor-version":[{"id":23229,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22829\/revisions\/23229"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=22829"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=22829"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=22829"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}