Invest
How can I spot a company turnaround?
Companies on the cusp of achieving a turnaround in their fortunes can offer savvy investors the opportunity to invest in quality that may not be readily apparent to others.
How can I spot a company turnaround?
Companies on the cusp of achieving a turnaround in their fortunes can offer savvy investors the opportunity to invest in quality that may not be readily apparent to others.
The idea of identifying opportunities that are underappreciated by the market is very appealing in that it usually comes with undervaluation. However, successful turnarounds are rare and often difficult to identify in advance.
A turnaround can be defined as a company changing from a poor quality company to a good one. This doesn’t mean companies whose improvement relies on the cycle, such as a building materials company benefiting from a housing construction boom, but rather a corporate change that is more structural and enduring.
Certainly in the current market environment, there are an increasing number of companies that recognise that they can’t rely on the economic cycle to boost their fortunes, and are looking for structural changes to improve performance and deliver better outcomes for shareholders.
Successful turnarounds can often give rise to an investment ‘double play’. Firstly, the company materially improves profits, often dramatically so. Secondly, this then leads to a change in investors’ perceptions, leading to a re-rating of the company’s shares through a higher valuation multiples. This double play compounds returns for shareholders nicely.
In addition to the potential outsized returns, turnarounds can also offer diversification benefits. Turnarounds represent upside that is generally stock-specific and, as a result, performance has far less correlation with the rest of the market. The ups and downs of the share price depend more on what is going on within the company rather than the broader stock market.
However, investors need to be cautious about investing in turnarounds as there are significant risks.
After all, a turnaround may not succeed. Worse still, considerable costs may have been wasted in the attempt and underlying profitability may have deteriorated further or additional harm inflicted. It will also dispel any hope that investors had that things will improve. As a result, the stock price may well falter or at least remain depressed.
From an investor’s point of view, it pays to stay close to the company in question. We tend to wait for genuine evidence that a company is in fact turning, most often through the company’s report financials, as head fakes are common in this game. As a result, we’re happy to give up the first 20 per cent or so of returns if it means greater certainty on the progress of the turnaround. Invariably this still leaves plenty of upside as the market slowly recognises what the company is turning into.
The reality is that it is far more common for turnarounds to fail than succeed.
There is often a fine line between success and failure in any turnaround situation and the trick is identifying which turnarounds will in fact turn.
There are a number of common attributes of successful turnarounds that investors should look out for:
- The existence of a strong underlying business or assets to work with. A business with good bones will find it much easier to successfully turn;
- A new CEO (often from outside the company) carrying none of the company’s historical baggage and who can drive the turnaround strategy;
- A corporate restructuring, generally aimed at building up the higher quality businesses and exiting unprofitable ones;
- Industry rationalisation, particularly as part of an attempt to beef up profitable businesses, with the added benefit of improving industry structures;
- An accommodative industry, in which a struggling company is allowed to re-emerge or where the industry, as one, works towards higher pricing and therefore profitability; and
- A recapitalisation, with the effect of addressing an over-leveraged balance sheet, which affords the financial flexibility to get through any difficulties that emerge during the turnaround and which allows investment into profitable growth opportunities.
These factors do not ensure the success of a turnaround, but their existence improves the probability of success.
Julian Beaumont, investment director, Bennelong Australian Equity Partners
Property
6 out of 8 capital cities have hit record-high dwelling values
CoreLogic’s national home value index increased a further 2.8 per cent at the end of March, placing values 5.6 per cent above the previous market peak in October 2017. ...Read more
Property
Macro-prudential policies a matter of when, not if
The Reserve Bank of Australia has confirmed that it will keep a close eye on trends in housing borrowing given the rising housing prices and low interest rates, with market pundits confident tighter c...Read more
Property
HomeBuilder drives record-breaking housing approvals data
Aussies are no longer able to get their hands on the government’s HomeBuilder program which, judging by the latest stats, has had a great level of success. ...Read more
Property
National home values soar at fastest pace in over 30 years
CoreLogic’s national home value index has recorded its fastest rate of appreciation in over 30 years, with capital cities said to have reclaimed the pole position, having been outpaced by regional m...Read more
Property
Australian house prices soar 500% in 25 years
Australian house prices have surged by as much as 500 per cent in the past 25 years, according to fresh data from REIA. ...Read more
Property
CBD reactivation critical to economic growth
CBD occupancy will be key to maintaining the momentum of Australia’s economic growth now that government stimulus packages are being wound down, the Property Council of Australia has said. ...Read more
Property
Melbourne property values reach record high
After months of lagging behind other capital cities, Melbourne has finally regained its footing, with values rebounding following a prolonged period of COVID-induced losses and ultimately surpassing p...Read more
Property
APRA slams ‘super for housing’ plan
Allowing first home buyers to tap into their superannuation for a deposit would result in a considerable property price spike, an industry regulator has warned. ...Read more
Home values up 30% (or are they); NFTs taking the world by storm, and why Keating thinks Aussies will be ‘poor’ in retirement
Listen now
Raging floods, the tech stock bubble and the ongoing SG debate
Listen now
Meet the Manager with Trilogy’s Philip Ryan: RBA rates and property price growth
Listen now
The continued property boom, ethical investing and engaging with your super fund
Listen now
Property
6 out of 8 capital cities have hit record-high dwelling values
CoreLogic’s national home value index increased a further 2.8 per cent at the end of March, placing values 5.6 per cent above the previous market peak in October 2017. ...Read more
Property
Macro-prudential policies a matter of when, not if
The Reserve Bank of Australia has confirmed that it will keep a close eye on trends in housing borrowing given the rising housing prices and low interest rates, with market pundits confident tighter c...Read more
Property
HomeBuilder drives record-breaking housing approvals data
Aussies are no longer able to get their hands on the government’s HomeBuilder program which, judging by the latest stats, has had a great level of success. ...Read more
Property
National home values soar at fastest pace in over 30 years
CoreLogic’s national home value index has recorded its fastest rate of appreciation in over 30 years, with capital cities said to have reclaimed the pole position, having been outpaced by regional m...Read more
Property
Australian house prices soar 500% in 25 years
Australian house prices have surged by as much as 500 per cent in the past 25 years, according to fresh data from REIA. ...Read more
Property
CBD reactivation critical to economic growth
CBD occupancy will be key to maintaining the momentum of Australia’s economic growth now that government stimulus packages are being wound down, the Property Council of Australia has said. ...Read more
Property
Melbourne property values reach record high
After months of lagging behind other capital cities, Melbourne has finally regained its footing, with values rebounding following a prolonged period of COVID-induced losses and ultimately surpassing p...Read more
Property
APRA slams ‘super for housing’ plan
Allowing first home buyers to tap into their superannuation for a deposit would result in a considerable property price spike, an industry regulator has warned. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
