Turnarounds In The Stock Market

The stock market is on a roll with the Nasdaq leading the way, up over 20% in the last three months.Will it continue? Hard to believe it stays on the current path, probably a few setbacks here or there.Still, with bond yields where they are, it will take many years of 2 and 3% interest rates payments to match what you got in the last three months in the equity markets.Yes, there is risk of loss, but you already have big gains in a relatively short time frame.

Turnarounds are always available in the stock market, as there are always companies whose performance lags and has a very low stock price. Does that mean they will make great investments? Not always, but it is certainly an area to consider when investing.

A few classic turnarounds over the last few years would be McDonald's (MCD) and Starbucks (SBUX).Ronald McDonald at one point was down to 12 bucks a share, and the big green machine was at 8 bucks a share only three years ago. Both have come roaring back and are stronger than ever.

Last year, Sears (SHLD) stock price was down over 80%.In fairness, it is currently up 110% for this year, but I don't think it is a great turnaround story. Competing with Wal-mart (WMT), Target (TGT), Costco (COST), Home Depot (HD), and Lowe's (LOW), among others, is a really rough market. So what other candidates are out there that look interesting?

The three that come to mind would be Hewlett-Packard (HPQ), Best Buy (BBY), and Research in Motion (RIMM). HP and Best Buy are market leaders with businesses that generate large amounts of cash and have pretty strong balance sheets.

HP is the current market leader of printer cartridges, and has actually expanded share over the last year. The problem there is in their software, consulting, and hardware offerings. With Best Buy, they have no debt and lots of cash and growth has slowed, along with a few too many big box stores. Both are very fixable, especially Best Buy, which should just shut down the non performing locations.Time will tell as to how these perform,  but in the meantime, you get paid dividends so time is on your side.

RIMM is tough because their products relative to Apple (AAPL) and Google (GOOG) are inferior.

Full Disclosure: Yale Bock and Y H & C Investments own HP and Best Buy for clients and for himself.

Disclaimer: As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.