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Turnaround Candidates: 75% Club

Jan month of 2012 is almost over and to stock investors, this month is turning out to be a pretty good month. This also means that 2012 overall would be a good year to be in stocks (as per statistics over decades). The markets are becoming more and more "stock pickers" markets. Forget about index investing in 2012. It's all about picking up right trends and stocks. Keeping that in mind, here is one idea of screening potential picks. I called it as "75% Club". The criteria is simple:

  • Identify stocks which are down by at least 75% in last 12 months (52 week high/low should be 4:1)
  • Research why stock is down by 75%. There can be multiple reasons for stock to go down by that much -  fears of bankruptcy (EK), change in business conditions or competition (SHLD, solar sector), stupid mistakes by management (NFLX), regulatory environment (BAC), macro-economic conditions like housing downtrend (MTG)
  • Find out if companies identified are going to run out of money and hence may have to declare bankruptcy (AMR, EK) - avoid these companies at all cost. Since they are going towards -99% 
  • Wait till stocks reach equilibrium. Many stocks keep going down even if they are down by 75%. They need to form a base where daily movements become small. e.g. NFLX went down by nearly 80% when it dipped below $65
  • Check out corrective steps taken by management, change in macro-factors, competitive landscape. When you believe that these are changing for better, start thinking of putting some money into these stocks. Start small quantifies
  • Let stock appreciate by about 10-15% from it's 52 week low before making further investments. It's better to invest with rising tide than catching falling knife. While you may miss first 10-15% gains, if stock as really reversed the direction, there are at least 50% more gains to have. After all to recover lost 75%, stock has to climb 300%
So which stocks meet the criteria in 2012?

  1. NFLX (Hi: $310, Lo:$65, CMV:$122). 20% upside (Target: $150)
  2. RIMM (Hi: $75, Lo:$13, CMV:$16.80). 20% upside (Target: $21)
  3. RDN (Hi: $8, Lo:$2, CMV: $2.6). 30% upside (Target: $3.50)
  4. JASO (Hi:$8, Lo:$1.21, CMV: $1.8). 30% upside (Target: $2.50)
  5. CECO (Hi: $27, Lo:$6.30, CMV: $10.60). 20% upside (Target: $13)
  6. AMED (Hi: $38, Lo: $9, CMV:$10). 25% upside (Target: $12.50)
This should give you enough idea of "75% club" and potential turnaround candidates. Personally I do apply this in my investments. I wish I had applied this to single best investment of last decade (and still going strong) - Apple. It went down from over $25 to around $7 in summer of 2001. That would have been $900 (considering split in 2005).
Next week would be crucial week for Presidential election since most likely Florida would seal the GOP nomination. Mitt is going to win Florida primary and Gingrich has started seeing the writing on wall. maybe that's why he wants to have an American base on Moon so that he could help make Moon as state of America! What a joke - especially when it comes from someone who had 1/3rd chance of becoming US President as recently as last week. 

/Shyam

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