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Capture Stock Market Value from Corporate Turnarounds

23 April 2007 - Features - Editor

Some of the best values in stock market transactions arise from investing in stock market companies which have suffered downturns, but which have capacities to affect turnarounds. However, not every organization succeeds in turning corners, and some continue to go downhill. Therefore, investing in a company which has performed below par is a risk from which most stock market players stay away. However, discerning investors make windfalls from such actions.

Core competence in at least one functional area, and customer goodwill, are two precious but covert assets which many companies with poor recent records on a stock market, may have. Identifying these strengths and their potential values lies at the heart of investing decisions that can produce superior returns. Such an approach requires a techno-commercial appreciation, and goes far beyond the number crunching and networking which many investors and their advisers love to do!

However, it is also true that no turnaround is possible without financial resilience. Expensive pink slips for incompetent employees, distress sales of some fixed assets, write-offs of some expensive litigations, and fresh investments in new technology, are the kind of painful but essential ingredients of changing direction for a company which has not done well in the recent past.

Most stock market quarters fight shy of injecting fresh funds in to companies with measly dividend and appreciation records. However, a clean and transparent accounting system can go a long way in allaying fears that new doses of cash will be wasted. Hence, a company in a downturn but with unqualified endorsements from reputed auditors should be a good buy.

Management capabilities and commitment are vital adjuncts of every turnaround. The best plans will come unstuck if crucial personnel abandon a sinking corporate ship. Similarly, the best accounting systems will go awry if executives do not abide by the relevant procedures. The canny stock market investor will inevitably spend quality time with key executives before putting money behind fairy take turnaround attempts.

The principles which govern appraisal of turnaround proposals are equally relevant for stock markets to gauge how long rapid growth and productivity improvements in their companies may last. Timing an exit from a stock optimally can result in tremendous opportunity cost gains. You may have dream price to equity ratios, but can grow cash generation exponentially by redirecting portfolios towards even better future returns. Executives generally lose no chance to herald their accomplishments, but wizened stock market operators sometimes make quiet moves to reduce their holdings in high growth and profile companies, in favor of lesser lights on the investing horizon. Investing on a stock market is obviously a dynamic game with hardly time for a blink! Strong processes for rational comparison of alternatives, help achieve sustained investing success.

 


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