Summary
- Out-of-favor and "turnaround" stocks can provide exceptional returns for investors who buy before the herd.
- Most investors avoid unpopular stocks and this is why these stocks can often be bought for a song.
- Both Genworth and Natuzzi are trading well below book value and could have significant upside potential as progress continues.
- I believe Genworth and Natuzzi offer investors rock bottom values in the share prices now and could offer returns of 80% or more.
It is often far more exciting and psychologically easier to buy stocks that seem to be strong and very popular with other investors. I do see why it is sensible to buy "strong" stocks in certain cases, especially if there is value to be had, but in a market that is close to record highs it has become increasingly difficult to find stocks that fit this profile. Overall I prefer to be a very selective contrarian investor which means I am constantly looking to buy stocks that are out of favor, possible turnaround plays and therefore cheap. These types of stocks often have a lot of bad news already priced in and investors often have low expectations which can lead to upside surprises. Warren Buffett has a clear track record of buying stocks which are out of favor and offer turnaround potential. For example, he invested heavily in Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) during the financial crisis back when those stocks were unpopular and trading for a fraction of their current levels. Both of those companies had to make many tough decisions in order to turn around and eventually get back into favor with investors. Even with many major market indexes now trading at or near record highs, there are a number of out of favor "turnaround" stocks that I believe offer significant upside potential, here are two ideas to consider now:
Genworth recently reported financial results for the second quarter of 2015. The company earned 24 cents per share on an operating basis which was below estimates of 31 cents per share. In what appears to be a very exaggerated move, the market has responded to this earnings miss by sending the shares down from about $7, to just around $5.25 per share. I really don't know of many stocks in this market that are trading for single digits that are earning 24 cents per share on a quarterly basis. What we have now is a $5.25 stock that is generating around $1 per share in annual earnings and trading at a mere fraction of the book value. If investors want to sell assets at this extremely undervalued level, I am happy to buy. Since the Financial crisis, Genworth shares have made big moves both up and down. Buying during bouts of significant pessimism has rewarded many investors in this stock, as has selling when optimism reigns as it did about a year ago when it was trading for roughly $15 per share.
Genworth stock seems to be very undervalued when you consider that book value is nearly $30 per share. Furthermore, this stock looks cheap on a price to earnings ratio when compared to the rest of the market as it trades for less than 5 times earnings. Analysts expect Genworth to earn $1.06 per share in 2015 and $1.12 per share for 2016.
Genworth shares could get a boost if the company spins-off the mortgage and long-term care divisions into separate businesses. The company is going forward with this and other plans and it has hired a firm to advise it on these types of matters. It has also implemented a plan to lower costs by $100 million per year in order to boost its turnaround efforts. While the market price for Genworth stock is very low, analysts at Raymond James see value and not too long ago suggested Genworth was a "strong buy" and set a $12 price target. This implies upside of about 80%. An analyst at StreetAuthority recently included Genworth as being on the "cusp of a major turnaround". A Barron's article detailed this bullish view which stated:
"Whether it's a massive share buyback (Hertz) or ongoing asset sales (Genworth) these stocks have catalysts to help them move higher," writes Sterman. "Both are deeply loathed right now, but their respective management teams have articulated clear-cut turnaround strategies. As long as they can execute those plans, investors are bound to re-visit these broken stocks."
It is hard to see Genworth shares going much lower as the valuation is exceedingly low on a number of fronts. As the expense reductions and asset sales take place, more clarity and progress on the turnaround could lead to significant upside on this out of favor stock.
Natuzzi (NYSE:NTZ) has a strong balance sheet with just about $37 million in debt (this is very low for a company with nearly $500 million in revenues) and around $32 million in cash. This financial strength reduces potential downside risks for investors. For the first quarter of 2015, Natuzzi reported revenues of 122.6 million Euros which is a nearly 25% surge over the 98.4 million Euros in revenue reported for the first quarter of 2014. This is now the third quarter in a row in which Natuzzi has experienced a strong jump in sales and this clearly indicates a trend and a strong turnaround. The combination of the weak Euro, rising revenues, lower expenses and European Quantitative Easing means that Natuzzi could have ideal business conditions for years to come. This stock has yet to take off and still trades below book value which is $3.58 per share. However, at least one analyst is starting to notice the surge in revenues and potential upside for Natuzzi shares and has recently set a $6.50 per share price target.
With all the challenges Europe has faced ever since the 2008 Financial Crisis, many U.S. investors have been avoiding that region. In response to the crisis and weak economy, the U.S. was quick to print money, lower rates and implement Quantitative Easing. However, the U.S. is now on the path to reverse this series of financial engineering events with higher interest rates and fade the Quantitative Easing programs. This is pushing the U.S. Dollar higher which is making it tougher for U.S. companies to compete globally. Just as the U.S. is reversing course, Europe is now finally doing the same types of programs to boost the economy, consumer spending and reduce unemployment. We all can see how much money equity investors made by buying U.S. stocks as these financial engineering programs were implemented, and now we have another chance to have this potential with European stocks. In a recent CNBC article, Goldman Sachs even says to buy Europe and dump U.S. stocks. With this in mind, my top European turnaround stock pick is an Italian furniture maker, Natuzzi which trades for just over $2 per share now. I like Natuzzi because this company has implemented cost cuts in an effort to return to profitability and at the same time it is now benefiting from a surge in revenues thanks to improving demand for furniture in Europe and other countries. In a previous article, I explained how I researched the gains achieved by a number of top publicly traded U.S. furniture companies since Quantitative easing started and the average return was about 400%. I believe Natuzzi could see the same types of gains over the next 2 to 3 years.
Natuzzi has a strong balance sheet with just about $37 million in debt (this is very low for a company with nearly $500 million in revenues) and around $32 million in cash. This financial strength reduces potential downside risks for investors. For the first quarter of 2015, Natuzzi reported revenues of 122.6 million Euros which is a nearly 25% surge over the 98.4 million Euros in revenue reported for the first quarter of 2014. This is now the third quarter in a row in which Natuzzi has experienced a strong jump in sales and this clearly indicates a trend and a strong turnaround. The combination of the weak Euro, rising revenues, lower expenses and European Quantitative Easing means that Natuzzi could have ideal business conditions for years to come. This stock has yet to take off and still trades below book value which is $3.58 per share. However, at least one analyst is starting to notice the surge in revenues and potential upside for Natuzzi shares and has recently set a $6.50 per share price target.
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
advisor.
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
advisor.
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