The Turnaround Stock in Our Midst

The Turnaround Stock in Our Midst

You may have noticed that we mention Peter Lynch’s “One Up On Wall Street” quite a bit around here. It really is a must-read for any would-be retail investor out there. It’s full of excellent insights from one of the most successful investors of our time, but one of my favorite parts of the book to reference is his different classifications of stocks. He gave us six definitions that virtually every public company can fall under. They are: 

  1. The Slow Growers: slow-growing companies in aging industries, may have nice dividends but not really our style here at MyWallSt.

  2. The Stalwarts: well-known names with consistent earnings growth that can weather most economic conditions.

  3. The Fast Growers: companies posting double-digit growth figures every year, the exciting companies we all love to invest in. 

  4. The Cyclicals: earnings and growth follow predictable cycles, usually depending on external economic conditions.

  5. The Asset Plays: companies that own valuable assets such as real estate or stakes in other companies. The trick to asset plays is finding them before the rest of the market does. 

  6. The Turnaround Stocks: companies that have gone through hardship but weathered the storm and are on the road to recovery. 

The fast growers get the most attention, and rightfully so. People want to invest in companies with growing revenues, future-relevant products, and great growth stories. However, when everyone has the same idea it usually ends up in some rather haughty valuations. In a discussion with our CEO Emmet this week, the two of us actually found it hard to find a stock we both liked that hadn’t doubled or tripled in value in the past year! 

Now, just because a company has been on a good run doesn’t mean you should avoid it, in fact, most of the best stocks will come at a premium for the duration of their time as a public company. Just look at Amazon! However, the fact that the market is so expensive right now has motivated me to look away from the fast growers for once and try and identify stocks that fall into some of the other categories. 

While stalwarts play a pivotal role in every portfolio, and cyclical and asset plays can always lead to uncovering a hidden gem, the best of the rest, in my opinion, is always the turnarounds. These are the businesses that have found themselves down on their luck and out of favor with investors, yet under the surface, they are working hard to rectify whatever issue has caused its slump. Two that spring to mind from this year are NIO and Penn National Gaming, which are up 1700% and 1800% from their 52-week lows respectively. Both companies had serious cash flow problems and there was a real risk that they may not survive, which will be far outside many people’s risk tolerance, but it shows the potential gains to be made in these turnaround stocks. 

The one potential turnaround that has sparked my interest, and is thankfully a lot less risky than NIO and Penn, is Twitter. The stock has languished since its debut on the public markets and is around the same size in terms of market cap as it was when it IPOd seven years ago. When it comes to users, Twitter is actually the 15th largest social media platform in the world. While some of the names like Wechat and Sina Weibo operate in China where Twitter is blocked, it is still trailing Facebook, Whatsapp, Instagram, TikTok, Reddit, Snapchat, and Pinterest domestically. For a company with such cultural significance and brand recognition, it has seriously underperformed its potential.

I think this is why activist investor Elliot Management bought a stake in the company back in March, and we may be seeing the effects of its influence. It started its tenure as a Twitter shareholder with a rather combative ploy to oust Jack Dorsey as CEO — they didn’t succeed by the way — and its presence on the board has continued to light a fire under the company. The stock has jumped almost 40% since Elliot became involved. In that time we’ve seen an announcement about the company exploring a subscription model and even entering talks to partner with TikTok. For a company whose greatest innovation in 7 years was expanding the character count on Tweets to 280 characters, these are some pretty significant moves. 

Twitter has shown that it can’t match the growth of TikTok, nor the advertising prowess of Facebook, yet I still believe that there is a lot of fight left in this old dog. It has established itself as the home to real-time news and so many political, financial, marketing, and sports messages are first brought to an audience in the form of a Tweet. Whether it is a subscription model to monetize these media companies which have used its platform as a primary form of communication for so long, or a slightly less ambitious acquisition strategy, with a little creativity and some long-needed innovation, Twitter is in the position to unlock some significant shareholder value in the future. 

Now, at a $35 billion market cap, it won’t be delivering the same jaw-dropping results as a NIO or a Penn National, but the recent news is telling me that there has been a shift in the right direction at the company. I’m excited to see what the future holds and will be watching it closely in the coming months.  

I’d love to hear if you have any ideas on a turnaround stock that might be on your radar. Reach out to us on, wait for it, Twitter @MyWallStHQ.

MikeMike

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