Should You Invest in These Turnaround Stocks?
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in turnaround situations is a risky proposition. While declining stock prices can seemingly present attractive opportunities, sometimes those declines are well-justified. It takes a great deal of due diligence and patience to identify companies on the precipice of a successful turnaround. The task is even harder in the realm of technology stocks. These firms can go through extended periods of highs and lows due to the volatile swings of consumer favor toward a particular technology. Within the technology sector, there are a few down-on-their luck stocks that might be great turnaround stories. Or, they could simply be companies with dire prospects, whose declining underlying businesses warrant their collapsed stock prices.
On the subject of turnarounds, there is perhaps no better example than Hewlett-Packard (NYSE: HPQ). The company’s fall from grace has been well-publicized. After trading north of $50 in early 2010, HP began a nearly unimpeded decline down to its current level in the high-teens. The company reported a massive loss of $6.41 per share in 2012, due to higher operating expenses and a huge $18 billion impairment charge.
Their first-quarter 2013 results shouldn’t give investors any more of a reason to cheer. The company operates in six segments, and five of them saw revenue declines versus the first quarter last year. The only segment to see revenue growth was Financial Services. To be clear, many of Hewlett Packard’s core businesses—namely Printers and Personal Systems—are in decline.
On a positive note, HP continues to be a strong cash flow generator, producing more than $6.8 billion in free cash flow in fiscal 2012. HP uses part of that cash flow to pay a dividend to shareholders, which it raised 10% in 2012 and now yields close to 3%.
BlackBerry (NASDAQ: BBRY) has a new name and a new phone to its credit. Is that enough to right what is wrong with the company? Shares have doubled since their low of $6 per share, reached last fall, but are still nowhere near the highs of more than $60 per share seen only a few years ago. BlackBerry optimists can take solace in the fact that the company has a solid balance sheet with cash and equivalents that equal almost half the company’s market value. Furthermore, the company now sells significantly below book value.
The company suffered mightily from declining market share, particularly in the enterprise market, which was its bread and butter. The company now hopes its BlackBerry 10 will secure the company’s foothold in the enterprise market going forward, and has touted the new features and functionality of its platform that can be utilized by enterprise customers. Only time will tell if the company’s vision will be realized.
Fellow phone manufacturer Nokia (NYSE: NOK) is seeing hard times just like its rival BlackBerry. Nokia’s financial performance has been as poor as its share price performance. The company reported that 2012 full-year revenue declined 22% versus 2011. By partnering with Microsoft, the company’s hopes hinge on the success of its Lumia line of devices. Nokia is due to launch more competitively priced models in the near future as a way of expanding its user base. While the stock has doubled since hitting its lows seen last summer, it has still lost almost 30% of its value since the beginning of 2012 alone.
Each of these stocks has shown signs of life after prolonged, severe downturns. The question to investors now is whether these companies are truly on the brink of turnarounds, or if their stocks are simply benefiting from a ‘dead cat bounce.’ To be fair, valuations on each of these stocks are low and seem to be attractive. In the future, it’s critical to assess whether revenues and profits have hit bottom, or are set to keep deteriorating. Investors in these stocks would be wise to closely monitor their company’s results going forward.
rciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!