Submitted by George Putnam, III as part of our contributors program.
Reluctantly Picking Turnaround Stock Favorites for 2014
Looking to spruce up your portfolio with a few promising turnaround stock picks? These value investing opportunities offer the potential for extraordinary stock profit.
Just as I am always hesitant to make a stock market forecast, I never like to pick out just a few of my purchase recommendations as favorites. But also like the market forecast, around this time of the year I get persuaded to do it anyway. Before turning to the stocks, it is worth talking a little about why I don’t like picking favorites.
The main reason is diversification. Five stocks are not enough to provide adequate diversification to reduce risk—even though I pick stocks from different industries. Secondly, picking favorites from my contrarian investing newsletter‘s recommended list feels a little like picking favorites among your children—I like all our recommended stocks or else I wouldn’t have recommended them. The third reason may verge on superstition: Often in the past when asked to identify a few favorites, those stocks have done badly for at least a while.
That wasn’t the case in 2013, however. In fact, the five stocks I named as the Top Turnaround Stocks last year around this time have gained an average of more than 90% so far in 2013. With those caveats, here are a few of my favorite stock picks for 2014. Two additional stock picks are named in my value investing newsletter.
Accuride Corp. (ACW): While orders for new trucks remain weak, this wheel maker has fixed its manufacturing problems over the last couple of years, and become leaner and more efficient. Among other things, it has upgraded equipment and shut down less efficient plants. As quality issues fade into the past and delivery times get more dependable, the company has been able to win more business. And with costs coming down, profit margins are improving. While we can’t say exactly when it will happen, we expect demand to come back as the economy continues to improve, and when it does, the company is well-positioned to profit.
FelCor Lodging Trust (FCH): This hotel owner has done a good job transitioning its portfolio to more upscale properties in stronger markets. The company has sold a number of its weaker locations while acquiring a few marquee hotels in strong urban markets, and it is renovating and repositioning several others. These moves are beginning to improve the bottom line. The company has also refinanced much of its debt to reduce interest costs. Demand for hotel rooms is rising as both business and leisure travel continues to rebound, but the supply of rooms is fairly static because it remains difficult to get financing for new hotels. Rising demand, steady supply, better properties and lower interest costs bode well for FelCor stock.
Freeport-McMoRan Copper& Gold (FCX): While the stock has bounced a little off its mid-year lows, it remains a good way to play a likely rebound in metals prices. Freeport has extensive mineral reserves around the world. In addition, Freeport has a good history of expanding reserves through a combination of exploration, development and acquisition. Most of the company’s reserves are of a high quality, allowing it to be a low-cost producer and generate strong margins. Freeport has recently diversified into oil and gas properties which should reduce the volatility in the stock. Even if you have to wait a while for a commodity rebound, you will be compensated by the generous dividend.
Disclosure Note: Accounts managed by an affiliate of the publisher own ACW and FCH.