george PuTnam

the turnaround letter

FoCus: Value stocks with catalysts for turnarounds

strategy: Turnaround situations are often neglected by wall Street research and by most investors because they often require a different type of analysis and a willingness to go against the crowd. As a result, they offer the potential for superior returns. Putnam draws upon his background in bankruptcy and turnaround situations to identify out-of-favor stocks that have real value and are undergoing significant positive change.

Case study: One of Putnam’s most recently completed turnaround investments is adVaNCe auto Parts (AAP). Profit margins were less than half those of its direct competitors because of poor integration of a long series of mergers, a disorganized supply chain and distribution network, and inefficient store operations. Because of these concerns, as well as fears of tepid near-term growth and competition from Amazon, investors had pushed shares below $100, about half their peak. Advance’s valuation of 7.7x EV/Ebitda was at a 24% discount to its peers. with the backing of activist investor Starboard Value, the company’s highly capable new leadership executed an impressive turnaround. Just over a year later, shares had risen 80% to $179 when Putnam closed the position. Another turnaround example is CroCs (CrOX), maker of the iconic rubberized shoes. In 2016, the market was missing a meaningful turnaround that was already under way, led by a new CEO with the backing of a $200 million investment from private equity firm Blackstone group. Putnam recommended CrOX at $8.35. “Investor doubts sharply reversed in mid-2018, leading to a surge in the stock to $21, where we closed out our recommendation,” Putnam says. Turnaround stocks are not for everyone but they may be for you. Find out at forbesmagazine.com/turnaround