2 Picks from the Rebound King
07/08/2013 7:45 am EST
For almost three decades, George Putnam has been finding value at the bottom with his Turnaround Letter, and here he explains two current stories he likes.
Steven Halpern: We are here with George Putnam, the industry's leading expert on turnaround stocks. George, will you be kind enough to tell our listeners a little about the Turnaround Letter?
George Putnam: Sure, Steve. We launched the Turnaround Letter back in 1986. I was very impressed by how much the stock market and Wall Street tended to move as a herd and follow the same kind of hot stocks. After doing some research, I felt the best opportunities were in the very beaten-down things that Wall Street hated at that moment.
But if you could spot the fact that they would be turning around, that is where the biggest profit was. That is what we have been doing ever since, looking for situations that will be turning around.
Steven Halpern: One of the most interesting things I find about your letter is that each month, you go into an industry or sector and give an in-depth profile on why you believe that industry is poised for turnaround opportunities.
You recently looked at the major oil stocks and had a favorable outlook. Could you tell us a little bit about your view on the oils?
George Putnam: Sure. Well, what first brought the oils to our attention was the fact that in this year, when everything was going up, they were not. So I started to look into it.
I think they are just a little bit stodgy for this sort of hot market. But I have always felt that the big oil stocks were good things to hold in your portfolio.
First of all, they are very solid, long-term businesses. They are backed by real assets in the ground. They always manage to make money whether oil prices are going up or down, and many of them have very good yields. And the fact that they do not always move with the rest of the market...that is a big plus.
Steven Halpern: Would you comment on one or two of the oil stocks that you think investors should be looking at now?
George Putnam: Well, we especially like BP (BP). It is the most out of favor of the group for obvious reasons.
Since it had the explosion in the Gulf of Mexico a couple of years ago, investors have been worried about the liabilities that the company will face. But the company has solved many of those liabilities, and in getting ready to deal with these liability issues, they have really streamlined the business.
They have sold a lot of assets, something around $40 billion worth of assets in the last year and a half or two years. They have refocused on higher-margin businesses.
Plus, they are really focused on giving money back to shareholders. They are doing a share buyback and they have a very hefty dividend too, now more than 5%.
I think that the fears of their remaining liabilities are overblown. In the worst case, they have lots of resources to meet those liabilities, and if they can settle the remaining cases or get favorable judgments, the stock will move up quite sharply.
Steven Halpern: At the beginning of the year, you recommended MGIC (MTG) as a top pick for speculative investors for the year, and the stock is already up over 130%. I was wondering if you could give us an update on MGIC and your outlook for the company.
George Putnam: Sure. It has moved up a lot, but I think it has a lot further to go. It is one of the two leading mortgage insurance companies—and in fact, they are one of the few players left in that market.
As housing picks up and you get more transactions, the banks and the mortgagers will require mortgage insurance from a lot of borrowers. and MGIC and also Radian are the two places to go for that now.
Having been burned in the housing crisis back in 2006 through 2008, they have really refined their standards for insurance, so the new business is highly profitable. There are still risks. They do have legacy liabilities from their earlier problems. But those are getting smaller as house prices go up and as the problems get worked off.
While there are risks in the stock, I do not think they are all that great. I think you could see this stock in the mid-teens if things go well.