Being a contrarian investor means more than simply finding beaten-down stocks that have been abandoned by the marketplace. Primarily, because many stocks are beaten down for good reason. Ineffective leadership, an unimpressive product lineup, poorly managed costs or other ongoing problems will cause these companies to continue to struggle. These problems do not simply resolve themselves.
If shares are cheap, even relative to prior price levels, that does not mean they offer value, the market may simply be accurately evaluating the company’s prospects.
The most attractive value stocks are those that have some reason to return to favor. There needs to be a visible solution at hand for the underlying company’s problem – a catalyst for change. Catalysts can include new leadership (a new CEO or board chair), interest from an activist investor, emergence from bankruptcy, a spin-off transaction and others. A strong catalyst can jump-start a struggling company toward a more prosperous future.
Finding catalysts can be difficult, however. Stock screens, a widely used source of ideas, don’t include catalysts. High-profile CEO changes or activist campaigns make the headlines, but most catalysts occur quietly and can be arduous to find. Hedge funds and other specialists have proprietary catalyst sources, but they don’t share them with other investors.
For these reasons, we have created our own Catalyst Report. This monthly publication is an extensive listing of companies that have experienced a recent catalyst. Some are strong enough to turn today’s laggard value stocks into tomorrow’s turnaround winners. In a typical month, we list 40 or more companies with meaningful catalysts. We encourage you to take a look – it is popular among our subscribers and unique on Wall Street.
One highly effective technique is to find Catalyst Report companies that also have out-of-favor stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. Often enough, some of these names become Buy recommendations.
2 Turnaround Prospects to Buy Now
Earlier this year, the Catalyst Report highlighted McAfee Corp (MCFE) and Danone S.A. (DANOY) as having out-of-favor stocks with major changes that could drive their shares higher.
McAfee (MCFE) – The October 2020 initial public offering of McAfee, a global technology security company, marked an important change in the company’s ownership and priorities. A second and equally powerful catalyst was its March 9 announcement that it was selling its Enterprise business for $4 billion in cash. The shares have moved sharply since then, helped further by its $4.50 special dividend.
Danone S.A. (DANOY) – Danone is a global food company, with sales of nearly $30 billion, that specializes in yogurts, bottled water and other health-oriented products. The shares have gone nowhere in 15 years. After the former CEO was ousted in March for chronic underperformance, the board lured respected executive Antoine de Saint-Affrique to turn around the company. Recently, Danone announced that its entire board of directors will retire by 2023, a powerful catalyst that paves the way for more aggressive changes.
What criteria do you look for when identifying contrarian investment opportunities?