6 Swings for the Fence

11/04/2011 9:30 am EST


George Putnam

Editor, The Turnaround Letter

It’s not always warranted to swing for the fences, but occasionally going for a big gainer can spice up your portfolio, writes George Putnam III of The Turnaround Letter.

One good thing that comes out of a sharp downturn in the market is that it often creates some very low-priced turnaround opportunities with home run potential.

The recent market volatility has done just that. You just have to remember that just as home run hitters strike out a lot, stocks with high return potential also have higher levels of risk.

Below, we highlight stocks that have the following characteristics:

  • they currently trade below $5, and they trade at a relatively small fraction of their two-year high;
  • they all have a decent business franchise that could support a much higher stock price;
  • they have a reasonable chance to be long-term survivors (although that is not absolutely assured).

Of course, they all have significant issues as well, or else they wouldn’t be trading at such low prices…

Brocade Communications (BRCD)
This producer of networking equipment is a survivor of both the bursting of the tech bubble in 2000 and the options-backdating scandal of 2006. The company has the potential to be a big beneficiary of the current movement to “cloud” computing.

Builders FirstSource (BLDR)
A distributor of building products for residential construction. The company’s stock began trading in 2005, peaked at $26 within six months, then collapsed to below $1.

Recently, management reported that revenues have begun to rise again as the company is taking business away from smaller competitors who are failing. To succeed, Builders needs an upturn in homebuilding, but it has sufficient resources to wait another couple of years for the rebound to occur.

Cemex (CX)
A Mexico-based, global building-materials company that services customers in more than 50 countries. With infrastructure and commercial work accounting for a major use of cement-related products, the company has faced operational challenges in recent years.

The company took on a lot of debt to finance a major acquisition in 2007, but it is now making decent progress in reducing overall leverage. While the debt load is still heavy, the company appears to have the staying power to wait for an upturn in construction.

Excel Maritime Carriers (EXM)
A dry bulk shipper of cargoes such as iron ore, coal, and grains. The company has struggled recently because charter rates have been hurt by a host of new ships coming on stream—a legacy of the good days prior to the last recession.

Fears of a new recession have pushed the stock down further. Excel has a fairly heavy debt load, but its lenders appear willing to cut it some slack. If shipping rates improve, Excel will be a major beneficiary.

Exide Technologies (XIDE)
This company manufactures batteries for automotive and industrial uses. The stock has been on a rollercoaster ride, tripling in six months from January 2011 only to give it all back by early October on fears that a new recession would crimp demand for Exide’s batteries.

The company is also vulnerable to swings in the price of lead, its main raw material. If automotive and industrial customers avoid a major downturn, the stock should go back on the upswing.

MGIC Investment (MTG)
The nation’s leading provider of private mortgage insurance, MGIC is dependent on stability in the housing market.

If house prices continue to decline and foreclosures remain at a high level, the company could eventually fail. But if the housing market recovers, MGIC stock could be worth many times its current trading level.

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