As contrarian investors, we look for turnaround stocks that are out of favor but have real value, often with a catalyst. In a surging bull market like this year’s performance so far, these bargains can be difficult to find. And, why bother, when so many speculative stocks are seemingly poised to extend their gains?
One reason to be wary of momentum stocks is that their trendiness can unpredictably vanish – leading to quick and painful losses. It may take only a weak earnings report or unfavorable inflation data to reverse what had appeared to be a relentlessly surging stock price.
Turnaround stocks, on the other hand, have already lost their trendiness. Investors avoid them because their immediate prospects look uninspiring at best and often seem grim. But, if there is real value, and a catalyst, these out-of-favor stocks have the potential to generate strong returns even in difficult stock markets.
One such stock is Vodafone (VOD). We included these shares in our annual “Top Five Stocks for 2023” list – circulated widely in the financial media – which emphasizes the five stocks on our Recommended List that have the most favorable combination of upside potential and timeliness. Read on about why we think Vodafone is attractive.
Vodafone Group (VOD)
This U.K.-based company is a major telecom, cable and internet service provider. Its core markets include the United Kingdom, Germany, Spain and Italy, and it also operates in thirteen other markets ranging from Australia to Turkey. Vodafone has a sizeable business in Africa through its Vodacom segment. Its M-Pesa in Africa is one of the continent’s largest and fastest-growing digital payments services. All of these businesses provide the company with a strong base of business in a relevant and enduring segment of the economy. The company’s revenues and profits may not grow much, but they are reasonably durable.
Vodafone’s shares have tumbled 70% from their 2015 price level – they are clearly out of favor. Investors are frustrated that the leadership team has failed to maintain the company’s cost structure while also allocating its capital poorly. That its industry is capital-intensive and highly competitive hasn’t helped management’s weak execution.
However, change is coming to Vodafone. The recent departure of highly regarded activist shareholder Cevian, the arrival of billionaire Xavier Niel who recently took a 2.5% stake and telecom operator Emirates Telecom which now has a 10% stake, likely catalyzed the board into action – reflected in their recent removal of the CEO responsible for the company’s decay. While a new CEO has not yet been named, we believe that a highly capable outsider, who can bring a fresh perspective and a full mandate for an overhaul, would launch a sharp improvement in the company’s prospects. Possible changes could include re-focusing on the core businesses, full exits from tangential but valuable operations like Africa Vodacom and Vodafone Towers, exits or shut-downs of smaller market operations and side-businesses, and consolidation of one of the other three companies in the overly competitive U.K. mobile market and perhaps other markets. There is tremendous value to unlock within Vodafone.
One additional change – cutting the dividend – may lead to a short-term dip in the shares as the current dividend yield of over 8% has attracted yield-oriented investors who would then sell. But such a cut would be a fundamental positive, as it would indicate that the leadership is serious about changing Vodafone’s culture and would help trim the company’s unwieldy debt burden.
Curiously, Liberty Global plc, led by legendary telecom investor John Malone, said earlier this week that it has taken a 4.9% stake in Vodafone. Regarding the purchase, Liberty said “We believe, like many others, that Vodafone’s current share price does not reflect the underlying long-term value of their operating businesses, or their announced consolidation and infrastructure opportunities.”
Vodafone shares look highly appealing for investors looking for out-of-favor stocks, with real value, and a catalyst, in the current momentum-driven market.
The Cabot Turnaround Letter’s buy recommendations—with an annualized return of 19.2% over the last three years, compared to the S&P500’s annualized of 9.9% – offer quality turnaround stock ideas, commentary on the markets and other topics relevant to contrarian and value investors, all supported by our rigorous methodology, research and analysis. Let us help you sort through the market to find the best contrarian and turnaround stocks.
Disclosure: The chief analyst personally owns shares of all Cabot Turnaround Letter recommended names, including those mentioned in this note.