Right now we have Alcatel-Lucent Mania here at The Market Archive. This is due in no small part to the release of a company profile that talks a ton about anything and everything I know about Alcatel-Lucent. So why turnaround plays? Some of my favorite stocks are turnarounds. Am I a masochist? Do I have a death wish? No to the former, jury’s out on the latter if we are talking figurative deaths. Literal deaths are a no.
Turnaround plays are high risk, and high reward. Risk is a tricky thing. Research doesn’t really lessen risk, but makes you more comfortable taking them. The probability is fixed. Your research is not going to change the actual probability. Even if you spent days looking over everything you would still only be guessing. However, the more you know the more likely your guess will be an educated one. It is not a pure chance guess like flipping a coin.
Turnaround companies are ones that used to be higher. Most people get nervous when you tell them that they are on untested ground. Turnaround stocks have all this precedent to dictate potential levels of support and resistance. I’m not big on technical analysis, but there is some benefit to knowing that you are not walking new ground.
Apple could be pushing new and new highs, but you don’t have a resistance line to sell at. You have to hold on and hope it continues. What if you bought at $500 for the ride to $700, but the stock has never been to $700 before. It just feels weird to me to blaze new territory. I can’t be alone out there. There has to be comfort in knowing that a stock is retracing old ground rather than testing new levels.
Let’s talk a little bit about the rewards. ALU is at $1.50-$1.70 or around there. The market cap is like $3B, but revenue is at $19B. This gives you an idea of the real size of the company. Juniper has a market cap of $11B and like $4B in revenue. All the valuations are deserved, but it shows that ALU has room to grow. The market cap of a healthy ALU will be greater than $11B. Let’s say 5x so the price would be $7.50 or more. I think $10 is reasonable. That is over 5x from these levels. All the company has to do is cut expenses and increase revenues. In fact just cutting expenses would do the trick but it’s easier to do both at the same time on a quest to profitability.
Those are the kinds of gains that come hand in hand with turnaround plays. The risks are substantial, but I am comfortable ALU for now. The injection of capital pushing back some ticking clocks. I like the products and the path for now. Some things could be better, but that will always be the case.
AMD is another severely depressed stock that has a safety net, and is leveraging some interesting technologies to keep its relevance in the future. These companies are staying public while doing this. Compare that to Dell which is either going private now or will be eventually. Future products are always important. Nobody can coast on one success forever. Sometimes it can be a long time like Microsoft and Windows, but eventually they need to move out of their comfort zone and try something new. This includes completely new things like the Xbox and slightly new things like Windows 8, which breaks from precedent.
Turnaround plays are also interesting, because these companies are going for broke. You get the best thinking when your life is on the line. There is pressure of failure, which can be unproductive for certain personalities. Then there is pressure of survival. After the initial shock everyone gets it into their head that its focus and win or be useless and die.
New technologies and new strategies come out. Alcatel-Lucent is just so interesting compared to some other company. Also, the catalysts have huge effects since the stock is so beaten down. All-in-all it’s just really fun. Obviously there are risks and it’s about money so contain your exuberance.
Let us sum up, because this barely counts as a real lesson. It is just some investment philosophy really. I prefer turnarounds because the reward potential is high, and the company just has to get to normal not to any new heights. The potential for returns is massive. ALU could get 10x in the next few years. How long would you wait to turn 1k into 10k? Is $1k worth the risk of getting to $10k? Those are questions you need to ask yourself. For me it is yes, because I don’t trust small movements or really long time lines. 5-10 years fine, but anything above that? Forget it. You will never see me saying something is a 15 year investment. Buy and forget for me means see where you are at when you get around to it and keep up on the company. It does not mean watch the stock tick every second. Check on it at the end of the day. 10 years tops, because I’d sell before then. Not as a rule like on that day after 10 years I will sell. I just know I’d be out.
I think I will spend more time on turnaround plays. Everyone needs a specialty. This can be mine. This is a pure theory article not a lesson.