When a company is headed in the wrong financial direction and they want to reverse course, this is considered a turnaround situation. A company on this path often doesn't see the light at the end of the tunnel. It may or may not be the company's fault. Outside factors such as an unexpected law suit or increased government regulation could put a strain on cash reserves.
As an investor, you can take advantage of a turnaround situation if you know what to look for. There are opportunities to participate in a turnaround situation that often times are not as drastic as a company heading into bankruptcy. Some turnaround situations rise from short-term events such as a mistake in the direction the company took. As an example, maybe a company opened a new store... only to find out unexpectedly that a major highway was going to be built next to it. The highway project significantly cut down consumer traffic that was very high when the feasibility study was undertaken. Or maybe management just calculated wrong and the store was not profitable. Nonetheless, after investors sell the stock after blaming management, the stock could be sitting at an attractive price.
Some of the best penny stocks are frequently sold off disproportionately to the loss that a company has incurred. A company that has suffered a 20% drop in their earnings will see a greater percentage drop in the stock price than the percentage of earnings it lost. This happens naturally as investors lose faith in the ability of the company to produce profits. But the price of the stock could potentially turn around and recover to its previous price if the company gets back the earnings next quarter.
The problem is that investors sometimes overreact and in turn, overlook the benefits of a negative event. Companies go through different stages in development. If the fundamentals of a company still exist even when it runs into tough times, investors who watch closely often can find a bargain with a company in a turnaround.
No comments:
Post a Comment