Ten Turnarounds

12/26/2003 12:00 am EST

Focus:

Jim Jubak

Founder and Editor, JubakPicks.com

"A healthy economy will help all stocks next year, but the outsized gains may well come from beaten-up stocks in various stages of turnarounds," says Jim Jubak in his Jubak's Journal for CNBC on MSN Money. Here are highlights from his latest review, "10 Dogs Ready to Bark in 2004."

"The biggest improvements in 2004 may well come from sound but recently troubled companies. That will come as the strong economic recovery, which is what we're looking at in the first half of 2004 at least, lifts all corporate boats. Turnaround companies aren't the first to see better sales and earnings, but, because recent business has been so weak, the turn from the bottom can be dramatic. Not all the stocks on this list are equal, of course. I'd divide them into three groups.

Mature Turnarounds

"Companies like these are far enough down the restructuring path that investors can be reasonably certain that the effort is going to work. For example, about 18 months after the company emerged from bankruptcy reorganization, Washington Group International (WGII NASDAQ) clearly has regained sufficient customer confidence to produce a growing backlog of engineering and construction work, including important security business. The stock still is likely to appreciate in 2004 and $40 is a reasonable target price. Boeing (BA NYSE) belongs in this group too, I'd argue. That's largely on investor faith in the proven turnaround abilities of new CEO Harry Stonecipher. Add Scholastic (SCHL NASDAQ), publisher of the Harry Potter series, here as well.

Reasonable-bet Turnarounds

"Companies in this group have taken significant steps to implement a clear turnaround plan. Examples include Schlumberger (SLB NYSE), which has sold the bulk of its Sema technology unit, a bad fit almost from the day in 2001 when the oil services company overpaid to acquire the business, and the company's plan to sell a stake in its smart-card unit in an initial public offering in 2004. Those are all part of Schlumberger's plan to focus on its oil services business. I think a reasonable target price for Schlumberger is $63 a share, about 25% above recent prices. In this group along with Schlumberger, I'd put HCA (HCA NYSE), with a target price of $54 a share, AK Steel (AKS NYSE), and Plum Creek Timber (PCL NYSE).

Still-Speculative Turnarounds

"These companies are implementing turnarounds that are still at significant risk of failure, such as Electronic Data Services (EDS  NYSE), or are months, perhaps even years, away from instituting changes that would make a successful turnaround possible. Disney (DIS NYSE) and Merck (MRK NYSE) fall into this category. EDS has done all the right things by bringing in new management, but it's still not clear that this will be enough. The prospects at Disney and Merck are equally uncertain. There, managers who have so far proved unable to fix problems are entrenched. Stocks such as Disney and Merck are turnarounds waiting to happen and definitely undervalued at the moment. But it's impossible at this point to predict when the new management necessary for a turnaround will get a shot at maximizing shareholder value.

"The best hunting for most investors is in Group Two: It offers the best potential for solid returns in a reasonable period of time, say the next 18 months. Group One is more suited to quicker trigger fingers because they are closer to the end of major moves. And Group Three requires patience, patience, patience, and slow-but-steady accumulation. As always, do your own due diligence. But also remember to make your picks with your own investing style and time horizon in mind. Investing in turnarounds only works if you don't change your mind before the stock changes direction."

Jim Jubak will be participating in Technology World Leaders Panel at The World Money Show in Orlando, Florida, February 5, 2004. Tickets are $59.00 through January 22, $69.00 afterwards. Click here   for more information or to purchase tickets.

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