Submitted by George Putnam, III as part of our contributors program.
Can A New CEO Lead The Turnaround Stock Upward?
One of the characteristics I like to see in a turnaround stock is a change in top management. Many times the management that led a company into trouble is not going to be able to fix the problems. A turnaround often takes special skills that many CEOs lack. Moreover, a new leadership team can take a fresh look at the company’s business and not be burdened by past mistakes.
However, it can take time to execute a turnaround, even for a skilled group of executives. This led us to look at the class of new CEOs who took over struggling companies in 2012. As they approach their second anniversary in office, they should be beginning to hit their stride.
I recently discussed several companies that, in addition to new CEOs, have some of the other key characteristics that I like to see in turnaround situations—including strong core businesses, well-known brands and decent balance sheets. Three of those stock picks are named here and the remainder can be found in my most recent contrarian investing newsletter.
Avon Products’ (AVP) venerable history dates back to 1886. But the company struggled as it began operating in a third century, and management attempted two different restructurings. Neither one achieved the desired result, and so in 2012 the board brought in a new CEO, Sheri McCoy. She was tasked with cleaning up a Chinese bribery scandal as well as kick-starting top-line growth. To improve cash flow, the dividend was cut and, in late 2012, the company embarked on a $400 million cost savings program. Then in late 2013, they cut short the implementation of a new $125 million sales software system. There are no balance sheet issues, the company’s brand is strong, and with the stock trading at a level it first hit in the 1990’s, it could have a lot of gain potential.
Dean Foods (DF), the largest domestic distributor of dairy products, saw its stock lose about 80% of its value from 2007 to 2011 as the company struggled under a heavy load of acquisition-related debt. After coming on board in 2012, CEO Gregg Tanner sold off assets and used the proceeds to reduce debt as well as fund a stock repurchase program and initiate a dividend. Management is now focused on the company’s core dairy business. While any commodity-based operation can be volatile, Dean’s dominant market share gives the stock good upside potential.
Quest Diagnostics (DGX) is the largest independent operator of clinical labs in the U.S. Though revenues grew steadily into 2009, growth then flat lined, and 2013 sales were below 2008’s level. In mid-2012 Steve Rusckowski took over as CEO, and he has engineered a string of acquisitions that, once the turmoil in healthcare settles down, should position the company for solid gains. The balance sheet is a bit leveraged, but cash flows are good and should support the company’s dividend and stock repurchases.