One of the commonest mistakes investors make is to buy turnaround stocks in the belief they've got a bargain. Anchoring investment decisions based on past performance is often a recipe for a portfolio of poorly-performing stocks, so I would suggest approaching any turnaround opportunities with caution.
Warren Buffett didn't say 'turnaround stocks seldom turn' for nothing, and when I saw the Australian Financial Review report that Citigroup had identified its "top 5 turnaround stocks" to buy I wondered just what merits these turnaround opportunities actually had. Here's a look at Citigroup's five potential turnarounds to buy.
QBE Insurance Group Ltd (ASX: QBE) is not a great business with a history of profit downgrades largely the result of the group getting out of its depth in various overseas acquisitions.
The strategy to cut costs and divest poorly performing businesses has plenty of room to run yet, and in my opinion trading for $13.85 QBE looks a sell.
Orica Ltd (ASX: ORI) is an explosives maker that faces tough times as the outlook for ammonium nitrate prices continues to soften in part due to oversupply concerns. The other problem Orica faces is the mining slump as most of its customers are miners of various commodities who are unsurprisingly reluctant to commit more capex in the current low-price environment.
Orica's board also had to sack its chief executive last month, reportedly for bullying staff. All this suggests the company is one to avoid.
Fletcher Building Limited (Australia) (ASX: FBU) is a New Zealand-based building company that has dropped around 12% over the past year, with some under-performing Australian businesses proving a thorn in its side. The business recently confirmed it expects full year earnings at the lower end of guidance between $650 – $690 million and looks more of a recovery stock perhaps worthy of a place on investors' watchlists.
Coca-Cola Amatil Ltd (ASX: CCL) is a solid business with plenty of potential, but so far management has only made the right noises in executing a turnaround, whether they can deliver is the real question. Cost cuts have also been implemented but there's no guarantee they'll have a positive long-term impact and all eyes will be on the full year results to assess the impact of recent changes.
Woolworths Limited (ASX: WOW) is a another solid business with potential but its giant scale means any hope of a quick turnaround is unrealistic. The business looks to be entering a challenging period and management's reforms will need to be radical to have a chance of success.
In my opinion investors don't need to go chasing turnaround stocks, especially when there's gangbusters growth stocks to be bought on attractive valuations…
