4 turnarounds from market's worst performers

For investors willing to bet against the crowd, these dogs could become tomorrow's darlings.

By TheStockAdvisors May 20, 2013 9:04AM
Investing losses © Colin Anderson/Getty ImagesBy George Putnam, The Turnaround Letter

One of our favorite places to look for turnaround candidates is a list of the worst performers in a certain segment of the market. Because investor sentiment can change very rapidly, today’s dogs often become tomorrow’s darlings, and those who are willing to go against the crowd can reap significant profits.

Among the worst performers in the S&P 500 index since the market hit its lows last June are Apple (AAPL), F5 Networks (FFIV), J.C. Penney (JCP) and Monster Beverage (MNST).

To be sure, many of these stocks carry some risk. There are, after all, reasons why they have underperformed.  But the market often overreacts to these risks, and if these companies can fix their problems their stockholders will be very handsomely rewarded.

Apple is a valuable reminder that when growth stalls, price-to-earnings multiples shrink and high-flying stocks can come down in a hurry.

But despite the fact  the stock is down almost 40% from its high just seven months ago, the company has great products, a powerful brand and a massive hoard of cash.

It may not be a great growth story any more, but trading at less than 10 times expected earnings and with a nearly three percent dividend, Apple now looks like a very attractive value stock.

F5 Networks has captured a leading share of the market for application delivery controllers used to improve web-based data-center applications. Cisco Systems exited the market, conceding to F5’s technological lead. But when demand from telecom companies began to weaken, F5’s operating results began to suffer.

With strong financials – no debt and about $1.1 billion in cash – management has plenty to work with as it expands the product line. The stock’s decline has brought the market cap down to a level where the company might be an attractive acquisition target.

J.C. Penney has been more of a soap opera than a turnaround story in recent months. When Ron Johnson came in as CEO and tried to mimic the techniques that had been successful in Apple’s retail stores, he managed to drive away many of Penney’s traditional customers.

The board did an about face, fired Johnson and brought back his predecessor, Mike Ullman. It remains to be seen whether the company can regain its balance, and so the stock is a high risk play with a potentially very high return.

Investment legend George Soros has just given the company a vote of confidence, acquiring a 7.9% stake. Penney has also just bought some time with a new financing deal.

Monster Beverage was a little known name a decade ago, but its energy drinks have captured a solid share in a rapidly growing market. Revenues, while still growing strongly, are not growing as rapidly as they once were.  Recent headlines questioning the safety of energy drinks have also hurt the stock.

But it is worth noting a 16-oz Monster energy drink has only about half the caffeine of a similarly sized cup of Starbucks coffee. The company has ample growth left, particularly in overseas markets.

The company’s top two executives have large stakes, which we like to see. Also, with Coca-Cola as a major distributor, the company could be an acquisition target if the stock remains depressed.

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