Each year, we select our “Top Five” stocks from our recommended list--those that look poised for the sharpest gains in the year ahead. Selecting these five names isn’t our favorite exercise. Embedded in our philosophy is a recognition that individual turnaround stocks can be risky, and so we always recommend holding a well-diversified group of these stocks. Also, we like all our recommended stocks--it’s just that some may be more timely than others.
How did our 2017 Top Five picks do? Three of our stocks (ACAT, CROX and FCX) had pretty stellar returns. Arctic Cat was a quick winner with a 23% gain when it was acquired in mid-January by Textron. Crocs posted an impressive 92% gain over the course of the year as its turnaround gained traction. Metals and energy producer Freeport-McMoran gained 42%. Our fourth pick, OAK, produced a decent total return of about 16% with the help of its high dividends. NIHD turned out to be a real clunker, losing much of its value.
Our new Top Five list may receive some press coverage, but as a Turnaround Letter reader, it’s only fair that you see the list first. With these thoughts in mind, here are our Top Five stock ideas:
Consolidated Communications (CNSL) – Despite a promising start when it emerged from bankruptcy, our originally recommended company, FairPoint Communications, struggled against industry headwinds and was acquired by Consolidated in mid-2017. Consolidated is a bigger, stronger company that, despite constant pricing pressure in its sector, has been able to maintain its profit margins and generate significant free cash flow, even after its generous $1.55/share dividend (12.5% yield). The FairPoint acquisition should make Consolidated even stronger, but investors fled from the telecom sector in general, and Consolidated in particular, in 2017, pushing its share price down 60% since late last year. At 5.9x EBITDA, the company is sending a good signal to investors.
Ford Motor Company (F) – While Ford has improved its car business over the past decade, it is perceived as having fallen behind its competitors in developing electric-powered vehicles and other next-generation technologies – not helpful in a stock market where investors crave glamour and technological prowess. We think investors are under-estimating Ford. The new CEO, Jim Hackett, is aggressively refocusing the company on new technologies while cutting spending in less relevant areas. Ford holds $26.1 billion in cash and produces a hefty $3 billion in free cash flow even after its generous $2.4 billion in dividends (a 4.8% yield). Its shares have declined 33% since 2013 while the market has gained nearly 50%. Ford’s shares look poised for a good ride ahead.
General Electric (GE) – While former chairman/CEO Jeffrey Immelt’s early years were full of promise, his 16-year tenure will be remembered for GE’s near-collapse in the 2008 financial crisis, the dismantling of GE Capital, its cash-draining share repurchases and dividends, poor governance and weak operating results. New CEO John Flannery is aggressively reshaping GE to focus on cash flows, capital allocation and accountability. The company has a tremendous opportunity to improve its core profitability. Its three retained divisions (Power, Aviation and Healthcare) have strong market positions and large installed customer bases. As much as $20 billion in non-core operations will be divested. Investors have fled from GE shares, which have declined 45% this year and now trade at their 1997 price level.
Mattel (MAT) – The toymaker is under stress from its dated product line and high leverage. Its cumbersome bureaucracy has squandered great franchises like Barbie, Fisher-Price and Hot Wheels in a world where the baseline competition is the iPad and YouTube. However, we think that new CEO Margo Georgiadis, a Google veteran who joined Mattel in January 2017, offers a promising future with her aggressive plan to completely restructure the company. She is adding impressive outside creative and executive talent, removing $650 million in costs, slashing the proliferation of unprofitable brand extensions and suspending the dividend - all to refocus Mattel on developing appealing and profitable products. The shares have declined over 40% this year. We expect results to improve, but if they don’t, the company could be a takeover target.
Weatherford (WFT) – Despite its respected oilfield service capabilities, Weatherford became a jumble of businesses thrust together by the whims of its dominant former CEO. Not only did this produce a remarkably inefficient company, it also led to a mountain of debt. When oil prices collapsed, Weatherford’s survival was threatened, leading to the CEO’s departure in late 2016. The arrival of the highly regarded and very capable new CEO Mark McCollum, formerly the CFO of industry giant Halliburton, in March 2017 launched Weatherford’s revival. He is focused on generating cash to pay down debt, integrating and standardizing the vast sprawl of products and services and improving accountability and discipline. The company anticipates returning to break-even cash flow in the current quarter and should soon complete its innovative OneStim joint venture with Schlumberger as well as the sale of the international drilling rig operations. Weatherford’s shares currently trade at eight-year lows. This turnaround will take time and progress could be lumpy, but Weatherford’s shares have tremendous rebound potential.
For 30+ years, George Putnam’s The Turnaround Letter has been identifying out-of-favor companies undergoing major changes that could drive significant share price appreciation. Contrarian investors know that turnaround investing can be very profitable: Year-in and year-out, many of the biggest winners on Wall Street are struggling companies that have successfully turned themselves around—resulting in outsized investor returns.
The Turnaround Letter's buy recommendations—with an annualized return of 12% over the last 15 years—offer quality turnaround stock opportunities, all supported by our trademark methodology, research and analysis. Learn more about The Turnaround Letter's contrarian insight, market analysis, monthly turnaround stock opportunities and more.
Disclosure: I am/we are long WFT, CROX, MAT, ge, CNSL.
Additional disclosure: Accounts managed by an affiliate of the Publisher, as well as employees of the Publisher, own stocks mentioned in this article.