Discovering Turnaround Candidates

Discovering Turnaround Candidates

Discovering Turnaround Candidates
There are many types of​ investment methodology out there .​
All of​ them has their own merits .​
I​ for​ one, personally like to​ invest in​ turnaround stocks .​
What is​ turnaround stocks? They are normally companies that are experiencing problems (hopefully short-term), and​ a​ lot of​ people are not willing to​ wait for​ those companies to​ recover.
I personally like turnaround stocks for​ two main​ reasons; First, turnaround stocks have problems in​ the open .​
The problem has been disclosed and​ our task as​ investor is​ to​ figure out how much the company is​ worth should the problem persists or​ when the problem goes away .​
Granted, there might be more problems discovered along the way .​
But at​ the very least, some of​ the problems has come out and​ the share price generally has dropped because of​ that.
Secondly, expectation​ is​ low for​ turnaround investment .​
Share price is​ already depressed due to​ known problems .​
The company does not have to​ 'beat expectation' every time it​ reports earning .​
All it​ has to​ do is​ clear out the problems that causes its stock price to​ drop on​ the first place.
How should one find a​ potential turnaround candidates for​ their portfolio? The one thing that I​ found useful is​ to​ read the financial news .​
Companies that are in​ trouble can be easily spotted in​ the news .​
for​ example, this​ week brought news from Pier 1 Imports Inc .​
(PIR) and​ Doral Financial (DRL) .​
Are these companies in​ trouble? Sure .​
Are they turnaround candidates? Possibly.
Another good source would be the list of​ stocks that are touching 52 week low .​
Most of​ these lists would be companies that are experiencing problems and​ hence has the potential of​ turning around .​
for​ example ATI Technologies Inc .​
(ATYT) trade closes to​ its 52 week low of​ $ 11.20.
What to​ avoid when sifting through lists of​ potential turnaround investment? I​ would avoid company that is​ getting hammered due to​ the delay in​ its financial reporting .​
No matter how low the share price is, investors do not and​ should not invest in​ companies that has some trust issues.
Once we identify our target, we can then do some analysis to​ determine the fair value of​ the stock .​
There are chances that some companies may never recover .​
So, we have to​ take that into accounts when doing fair value calculation​ .​
Calculating fair value is​ a​ whole brand​ new topic and​ I​ won't get into the details here .​
But obviously, a​ stock will have a​ higher fair value if​ it​ can recover from current problems than a​ stock that cannot overcome its current problems.

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