FINDING TURNAROUND STOCKS
Talk about slumping oil prices and degenerating Chinese economy. The two events continue to pull companies and markets down, specifically the energy sector. However, nothing in this world is permanent except change. Speaking of change, some firms attempt to make a comeback in the midst of difficulties. Here are three ways to determine whether a company is on the mend.
Investors normally search companies which have higher cash flow than debt obligation, indicating the firm is on the road to recovery. Not to mention a company with stable cash position can have a better opportunity to evade bankruptcy. Entities with greater debt load than cash may experience difficulties in overturning its business and/or repaying its debts.
Industry forces can make or break a turnaround firm. Many companies struggle and lose sales due to various factors. For example, Chipotle Mexican Grill shares doubled on the first day of its trading as a public entity. However, the Denver-based fast food chain was hit by E. coli outbreaks. Sales declined around 30% because of the health crisis and stocks have declined sharply. The Mexican fast food restaurant company took measures to determine and resolve the problem. Let’s presume Chipotle has begun reporting increase in sales. Investors may stipulate things are beginning to improve. Otherwise, they will simply think Chipotle is about to end its existence.
Spotting a turnaround stock entails looking at the corporate management and its industry. No matter how good the products and services are, if the market is not in good shape, it is rendered useless. It is important to be particular with the management team. A turnaround entity needs a tested-and-proven top executives to ensure recuperation is in full swing. Also, take note of the industry where a company belongs. That industry should not be a dying one so that investments won’t go down the drain.
Finding a turnaround stock is not an easy task. But if done correctly, one can reap hefty rewards.
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