Top Turnaround Stocks

by George Putnam, III
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Submitted by George Putnam, III as part of our contributors program.

Top Turnaround Stocks

The year is still young, and the stock market continues to be ripe with great turnaround investment opportunities—like my top turnaround stock picks. As detailed in my free stock report, I anticipate that the remainder of 2015, like just about every other year, will be buffeted with a number of competing forces.

On the positive side, the U.S. economy is growing and lower energy prices will put money back in consumer’s pockets. On the negative side, we have a looming recession in Europe and likely rising interest rates. It is becoming more and more challenging to predict the short-term movements of the stock market. That is why I’ve always encouraged investors not to try to time or outguess the market but to take a more measured approach by looking for underpriced stocks that are poised for a turnaround.

The three stocks discussed here represent a few of my favorite turnaround stock opportunities at the beginning of 2015. There is still plenty of time to cash in on these stock profit opportunities. If you want to learn more, I detail two additional turnaround stock picks in this free value investing report.

Accuride Corporation (ACW)

Background: Accuride produces wheels and related components for trucks and other commercial vehicles. It has a relatively short but tortuous corporate history. Founded in 1986 to purchase a division from Firestone, the company was acquired by Phelps Dodge in 1998 and then resold in a ACCURIDE CORP. leveraged buyout to Kohlberg Kravis & Roberts in 1997. It went public in 2005, but with a leveraged balance sheet it could not survive the 2008-09 recession, and it filed for Chapter 11 in October 2009. The company emerged from Chapter 11 in February 2010, but it was not out of the woods yet. Manufacturing problems surfaced at several operating units, particularly the Gunite brake division, which reduced volumes, hurt quality and raised costs. Then, as the company began fixing the production issues, orders for new trucks softened causing results to decline further.

Analysis: Over the last few years, Accuride has invested heavily in its operations with the result that it has not only fixed the earlier problems but also 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, the company has been able to win more business. And with costs coming down, profit margins are improving. In addition to streamlining its operations, Accuride has also been selling non-core assets to re-focus on wheels and related components and use the proceeds to improve the balance sheet. While demand for new trucks and truck components has been slower than expected for the past couple of years, it should pick up soon. Low fuel prices will increase the demand for trucking service at the same time as aging truck fleets will require higher replacement levels. Accuride has several large and savvy stockholders who have been patient to date. But if results do not continue to improve they may begin to agitate for the sale of the company. While the upturn in demand for new trucks remains elusive, we believe it is coming, and when it comes Accuride is well positioned to profit.

BP PLC (BP)

Background: Founded in 1909 as the Anglo-Persian Oil Company, BP is one of the world’s largest integrated oil companies. BP took its current shape with the merger of British Petroleum and Amoco in 1998. Today the company is involved in all aspects of oil and gas production, refining, distribution and marketing, and it produces petrochemicals as well.

Analysis: BP has suffered three major setbacks in recent years, but the company remains strong. If only one of the negative forces abates in 2015, the stock should rebound nicely. If more than one reverses, the stock could soar. In the meantime, the company pays a generous dividend to compensate you while you wait. The first setback was the 2010 disaster at the Macondo well in the Gulf of Mexico which was owned by BP. The company has been involved in litigation and claims payments ever since. This should finally begin to wind down in 2015. The market appears to be pricing in a worst case scenario for the remaining litigation, and so any less dire outcome would give the stock a boost. Setback number two is the escalating diplomatic conflict with Russia. BP has major investments in Russia including a 20% stake in OAO Rosneft, the giant, state-owned oil firm. BP’s ability to make money in Russia has been hindered both by the economic sanctions levied against Russia and by the fall in the value of the ruble. Here again, the market is probably pricing in the worst, and any thaw in relations with Russia would help BP’s stock. And then there is the price of oil, which has fallen from a high of $107 a barrel in June to the mid-50’s in late December. We certainly don’t have the expertise to forecast future oil prices, but our best guess is that they will turn up, perhaps sharply, sometime in 2015–and the stock will move up with them. BP isn’t just standing still waiting for something good to finally happen. The company is in the midst of a significant operational restructuring to reduce costs and boost efficiency. Meanwhile, BP currently has a dividend yield above six percent. While there is no guarantee that this generous yield will be maintained, the company just raised the dividend to its current level in late October, and so it seems unlikely that they would reverse course and cut it anytime soon.

GlobalStar, Inc. (GSAT)

Background: GlobalStar is a leading provider of satellite-based communication services. It was originally founded in 1991 as a partnership between Loral Space and Qualcomm. The increasing availability of land-based cellphone service reduced GlobalStar’s initial product GLOBALSTAR, INC. 8 offering, satellite telephone, to a narrow niche serving ships, oil rigs, desert locations and the like. The company was unable to service its debt from such a narrow market, and the company filed for Chapter 11 in 2002. When GlobalStar emerged from bankruptcy in 2004, Thermo Companies, which are controlled by a successful entrepreneur named Jay Monroe, acquired 65% of its stock. Since then, Monroe has invested more than $600 million in GlobalStar, which has allowed it, among other things, to upgrade its network of satellites. In addition, the company controls a large block of radio spectrum that it is currently developing for possible use as a new Wi-Fi network it calls Terrestrial Low Power Service (or TLPS).

Analysis: With an upgraded satellite network and reduced operating costs, GlobalStar is now able to offer superior satellite telephone services, and it appears to be taking market share in that niche away from its competitors. But the real upside in the stock comes from the potential to use its spectrum for the TLPS Wi-Fi service. As the traditional spectrum used for Wi-Fi becomes overcrowded in many areas, there could be a substantial market for TLPS, both in the U.S. and globally. The company is quite far along in the process for obtain Federal Communication Commission approval for TLPS. Moreover, a number of large companies such as Amazon and Cisco have expressed interest in the TLPS product. In October a hedge fund that was short GlobalStar stock launched a major press campaign disparaging the effectiveness of TLPS. The company has convincingly refuted all of the hedge fund’s arguments, but the stock has only recovered a fraction of the losses caused by the disparagement effort. We believe this creates an attractive entry level into the stock. As with any new technology, there are certainly risks that TLPS will not perform as expected. But we believe the upside potential in the stock outweighs those risks.

Disclosure Note: Accounts managed by an affiliate of the Publisher own Accuride and GlobalsStar.

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