Turnaround Situations

I recently wondered if investors really know what a true turn-around situation is. I thought that I would talk about this today by illustrating some ones I know about. I have only documentation on ones that I took advantage of.

TransCanada Corp

The first one to talk about is TransCanada Corp (TSX-TRP). For long term viability reasons, the company wanted to reorganize. This started in 1998 when they started to cut the dividend. Dividend cut occurred over the next two years and the dividend dropped some 35%. The dividend was at the lowest in 2001 and the dividend was completely restored and surpassed old levels by 2006.

The stock price fell some 70% between June 1998 and February 2000. It then started a long recovery and was back to old levels by the end of 2005. See the chart on this stock at Globe and Mail. I had had my eye on this stock for some time, but thought it was a little pricey. However, my March 2000 I noticed the price drop and bought stock. Buying good stock at a very low price certainly helps your long term total returns. This is a stock in a turnaround situation that I have held on to.

Teck Cominco

Teck Cominco (TSX-TCL.B) is the next company to talk about. This is a different sort of story. From a top in 2008 to the bottom in 2008, this stock fell some 92%. I bought some shares in November 2008 and sold them in May 2009. The stock price in that period increased some 240%.

This company's buying of buy Fording Canadian Coal Trust was probably badly timed in retrospect. They needed credit for this buy, but it occurred just as credit was freezing up due to economic problems in 2008. The company cut the dividend in 2009. It was not because they could not afford the dividend as they had good earnings and cash flow. The problem was trying to finance debt.

I believed that the market had over reacted and that is why I bought. The stock recovered and they restarted dividends at the end of 2010. However, dividends are not yet back to where they were in 2008. In 2008 dividends were $1.00 per share; in 2013 they are $0.90 per share. See the chart on this stock at Globe and Mail.

Canam Group Inc.

The Canam Group Inc. (TSX-CAM) company is into constructions, with exposure to the US market. It got into trouble in 2011. Between April 2011 and November 2011, the stock price fell some 66%. They paid two dividends in 2011 (the ones for March and June) and then stopped paying dividends.

Companies that cut or delete dividends are heavily punished and I thought that the market over-reacted to the company's problems. That is why I bought in November 2011. I did not buy much, but after making a couple of thousand dollars, I sold in April of this year. This was fun.

The stock price has recovered under this company. They have not yet restarted dividends, but I suspect that they will. The stock price increased some 105% between when I bought and sold. There is, of course, always a risk in such situations. I just thought that the market over reacted to prudent management. See the chart on this stock at Globe and Mail.

RIM

RIM or Blackberry (TSX-BB) is a different sort of story. I also know about RIM because ever since this stock has fallen by some 65% in 2008 people have been talking about it being a turn-round situation. There have been some false starts, but no turn around. This is a tech stock that lost its edge in the tech market. Will it recover? This is really hard to say. People are again talking about it recovering. See the chart on this stock at Globe and Mail.

Conclusion

Most turnaround situations involve a big drop in stock price. The can be caused by such things as re-organizations, credit problems, market share losses or recession. If it is a dividend paying stock, it will involve a drop or cut in dividends. A lot of companies with dividends have debt covenants which says under certain circumstances, a company must cut or eliminate the dividend.

Each turnaround situation has to be judged on its own merits. Questions to ask are possibly "Has the market over reacted? Is management being prudent? Can the company recover from its problems?" In any event, these situations are of high risk. If you guess right, you can get a nice reward.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.