4 potential comeback companies

This quartet of laggards could take off again with better management.

By TheStreet Staff Aug 17, 2010 10:57AM

thestreet.comBy Stockpickr at TheStreet

 

Two "old world" companies recently reported great earnings. I am talking about Macy's (M) and Walt Disney (DIS). Both supposedly "didn't get it" a few years ago.

 

They were assumed to be dying and soon to be dead. Digitalization of media and e-commerce were supposed to be their death knell. Both companies depend highly on discretionary consumer spending. Disney relies on vacation travel, both domestic and international. Macy's is neither luxury nor discount, left with a diminishing consumer base in the middle.

 

Not so fast.

 

Macy's and Disney proved how solid management, brand recognition and sticking to your knitting can pay off. Both were assumed to be a dying breed. I even chose Macy's as one of my worst-run companies a few years ago. They are great comeback stories, and I can kick myself for missing them.

However, there were plenty of other comeback stories I was able to latch on to, such as those of McDonald's (MCD), Ruby Tuesday (RT), Ford (F) and Apple (AAPL), all of which I still have positions in.

 

Remember AAPL a few years ago? The troika of Dell (DELL), Hewlett-Packard (HPQ) and Microsoft (MSFT) were digging the grave for AAPL. Who's laughing now?

 

In the past few weeks, Hewlett-Packard, for Palm (PALM), and Dell, for 3Par (PAR), announced acquisitions that the market was rather lukewarm about. Hewlett-Packard just lost its well-respected CEO, Mark Hurd, who resigned as a result of a sexual harassment scandal.

 

This of course prompts a question: What other companies are being left for dead? Which are so mismanaged that you wouldn't touch them with counterfeit money? It will take some hard work, introspection and new management to resurrect these companies.

 

However, it is not an insurmountable task. Here are a few possibilities:

 

Yahoo! (YHOO): Jerry Wang managed this company into the ground. Carol Bartz is just jumping into the grave and covering the company with dirt. I am tired of her use of superlative adjectives when describing the company's "achievements" during company earnings conference call.

 

She has delivered nothing, as far as I am concerned, during her tenure. Yet Yahoo has great brand recognition and content. It has potential, but not with the current team in place. Until it cleans house, Yahoo is just a stock to short on rallies.

 

Johnson & Johnson (JNJ): This stock has gone nowhere in the past eight to 10 years. Thankfully the dividend payout has risen nicely over that period and now stands at about 3.6%. Coated stents were supposed to launch Johnson & Johnson to new heights. That turned out to be a false messiah.

 

Johnson & Johnson has grown by making several acquisitions on a large and small scale. This company needs to scale itself back, put in a more proactive management team and think forward, not backward. It can be done, but it will take the right person at the helm.

 

Radio Shack (RSH): Can you think of a company that has had more personalities than The Shack? Veterans will remember Radio Shack having its Tandy Corp. several decades ago. Radio Shack sold radio and electronic components to at-home engineers for many years.

 

Then the company tried to become the store for battery solutions. Slowly it moved into consumer electronics and is now a big wireless retailer. Radio Shack needs to define itself.

 

The company has to find the right niche that will separate itself from Best Buy (BBY), Wal-Mart (WMT) and AT&T (T).

 

Citigroup (C): Citgroup has been tainted by the sins of its fathers. Now it is on the comeback trail. The behemoth that Sandy Weill, Robert Rubin and Chuck Price built has been in the process of demolition and renovation for more than two years now by Vikram Pandit. Under Pandit the company has:

  • Benefitted from federal government bailout programs.
  • Split operations into a good bank (Citicorp) and a bad bank (Citiholdings) and reduced the exposure and assets in Citiholdings dramatically.
  • Sold off noncore businesses.
  • Entered into a partnership with Morgan Stanley (MS) over its Smith Barney unit.
  • And seen an improvement in credit risk metrics.

Further, Citigroup has an excellent global franchise. Despite all of those positives, the stock is floundering. The reason for this is that the federal government is continuing a program of selling its shares that it received as part of the bailout. This is creating an overhang for the stock price. Once that pressure on the stock dissipates, the stock should be bid much better.

 

So keep an eye out for fallen stars, as they might not crash and burn but could rejuvenate and become rising stars once again. Management is the key. Out with the old could usher in a fresh new team that could be the key to a turnaround -- as we are seeing at Citigroup.

 

Scott Rothbort is a contributor to TheStreet's RealMoney and Stockpickr sites. At the time of publication, Rothbort held positions in McDonald's, Ruby Tuesday, Citigroup, Apple and Ford.

 

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