Investing in Turnarounds

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By www.ProfitableInvestingTips.c om Investing in Turnarounds

Transcript of Investing in Turnarounds

Bywww.ProfitableInvestingTips.com

Investing in Turnarounds

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In the aftermath of the worst economic recession in nearly eighty years there are a lot of companies that are just putting themselves back together

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The prime example was the company that once was the world’s largest corporation and the world’s largest auto maker.

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Things got so bad that General motors filed for bankruptcy and required a government bailout to stay in existence as a company. GM came out of bankruptcy.

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At the beginning of 2012 its stock sold for under $20 a share and now it sells for $35 a share.

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This brings up the topic of investing in turnarounds. Investing in turnarounds does not necessarily mean investing in companies that went broke.

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It can just be investing in companies that are displaying growth and vitality after a period of stagnation.

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For the long term investor interested in profiting by investing in turnarounds there are a number of things to look for.

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If the company is showing a profit it is important to understand where that profit is coming from. Is the company increasing its cash reserves?

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A company that increases cash flow by selling assets may be trimming down and getting rid of obsolete aspects of its business.

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However, the investor should not be fooled into thinking that this sort of cash flow represents a turnaround.

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The company needs to be improving products, widening markets, and profiting from sales.

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If GM continues its recovery investors should expect to see quarterly dividends resume.

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They should also expect to see the company’s products start to reclaim market share from competitors.

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In the case of GM this means Toyota, Ford, and to a lesser degree other automakers.

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Of course, once this is accomplished, the company in question will have a stock price commensurate with its success.

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The basic idea of investing in turnarounds is to invest before the turnaround drives the company’s stock price up.

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A useful clue as to what others with a vested interest think of the turnaround is if the turnaround company can get credit.

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In the case of GM it secured early on a $5 billion line of credit to assure constant cash flow.

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Considering how tight banks had become in offering credit early in the recession this was a vote of confidence.

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The investor will want to asset how much market penetration the company will be able to accomplish and to what degree it will be able to profitably price its products.

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In the case of a large company accomplishing a turnaround there will always be a limit to how far it can recover and grow.