How To Create Wealth Investing In - Turnaround Stocks

How To Create Wealth Investing In

Turnaround Stocks HowtoFindBuyandManageaPortfolioofOutOfFavorandDepressedStocks

ByBruceBergerCPACFECVA

www.turnaroundstockinvesting.com

HowToCreateWealthInvestingInTurnaroundStocks

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Table of Contents Preface............................................................................................................................................4

LegalDisclaimer..............................................................................................................................5

1.TheSearchForTurnaroundStocks.............................................................................................8

2.TechnicalAnalysis.......................................................................................................................9

1.TheDoubleBottom...............................................................................................................10

2.Alongbase............................................................................................................................11

3.ReverseHeadandShoulders................................................................................................12

4.AStockPriceThatMovesToTheRightOfADowntrendLine..............................................13

3.FinancialAnalysis......................................................................................................................16

4.AnalyzingManagement’sInterests..........................................................................................19

5.ManagingyourPortfolioofTurnaroundStocks.......................................................................21

CaseStudies..............................................................................................................................24

CloudPeak................................................................................................................................24

OverseasShipholdingOSG........................................................................................................25

Cott...........................................................................................................................................26

AESStockChart.........................................................................................................................27

RadianStockChart....................................................................................................................28

TerraIndustriesTRA.................................................................................................................29

StoltOffshoreSOSA..................................................................................................................30

AegeanMarine.........................................................................................................................31

HangerInc.................................................................................................................................33



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TeekayTankers.........................................................................................................................35

FordMotor................................................................................................................................36

AlphaNaturalResources...........................................................................................................37

PulteHome...............................................................................................................................38

BeverlyEnterprises...................................................................................................................39

WesternRefining......................................................................................................................40



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Preface. ThisShortEBookistheproductof30yearsdevotedtoinvestinginprivateandpubliccompanyturnarounds. If you have the ability to read a balance sheet and arewilling to learn how tointerpret a stock chart you will be on your way toward profiting from out of favor anddepressed stocks. Many small cap stocks are often priced for bankruptcy due to forcedliquidations,especiallyduringbearmarkets.Thosethatsurviveoutperformsubstantially.Someappreciate5-20,even100times.Youonlyneedafewofthesestockstobuildanestegg.

Therearea largenumberofvalue investingbooks in themarketplace.However, thisbook isuniqueinthatmystrategydoesnotpromotethestandardbuyandholdmentality.Thekeytosuccess in buying turnaround stocks is to cut losses, not double down on stocks that aredeclining.Manyinvestorsdon’trealizethatvalueinvestingisnotaneasygame.Infactalargenumberofvalue-orientedhedgefundsdisappeareachyearfrompoorperformance.Thisisduetoanunwillingnesstoadmitmistakes,whichcausesfundstodoubledownonbadinvestmentsthatoriginallylookedlikegreatvaluestocks.After30yearsofinvestingintroubledcompaniesandworkingwithsomeofthemostsuccessfulinvestorsinthecountry,it’sclearthat20%ofthestocksinaportfoliowillgenerate80%ofthereturns.CharlieMunger,WarrenBuffet’spartner,admits that if you took away a handful of their investments Berkshires returns would bemediocre. George Soros, perhaps an even better investor than Buffet, has made similarcomments.

Theprincipalenemytogreatreturnsisnotlackofknowledgeorpoorresearch.It’scontinuingtobuystocksthatarefallingandnotsellingwhenthemarkettellsyoutheturnaround isnotworking.Fightingadowntrendinastockpriceislikeswimmingagainstthetide.

Mystrategyemploysusingbothtechnicalandfundamentalanalysis.Technicalanalysisputstheprobabilities in our favor. Fundamental analysis puts reason in our favor. Combining thefundamentals and technicals is a powerful mechanism for raising our odds of success. ThisEBook will provide a systemic approach to buying and managing a portfolio of turnaroundstocks. The goal is to not only help you generate above average returns but maybe moreimportantly,preserveyourpsychologicalcapital.Thisbookisnotlongbutitscontentcanhelptoprovideyouwithalifelongedgeforinvestinginturnaroundstocks.



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Legal Disclaimer. NO FINANCIAL ADVICE IS BEING PROVIDED HEREIN. Neither Bruce Berger,TurnaroundStock Investing.com,TurnaroundCapitalPartnersLLCoranyof itsprincipals, officers, directors, employees, representatives, agents orindependent contractors (hereafter referred to as “The Group”) are licensedfinancialadvisors, registered investmentadvisors, registeredbroker-dealersoraffiliatedwith any FINRA | SIPC | or NFA-member firm. Any and allmaterialpresented in this E-book, or website, including video tutorials, indicators,strategies, columns, articles, emails, newsletters, and all other content(hereaftercollectivelyreferredtoas,the“Information”)areprovidedsolelyforinformationalandeducationalpurposesonly.

The Information provided does not constitute a solicitation of any kind or anordertobuyorsellafinancialsecurityorsimilarinstrumentandshouldnotbeconstruedasinvestmentadviceunderanyandallcircumstances.TheGroupwillnotbeheldliableforlossesresultingfromanyactions,includingbutnotlimitedtotrades,investmentsordivestituresbasedoninformation,inwholeorinpart,presentedinthisbook(orthroughathirdparty);theuseofsuchinformationisentirelyattheriskoftheuser.Theriskof loss intradinganyfinancialsecuritycanbesubstantial.TurnaroundStocksinvolveahighdegreeofriskandarenotsuitableforallinvestorsandshouldbereviewedbyanindependentregisteredinvestment advisor and tax professional. Historical results of any individual,tradingsystemorstrategypublishedbytheGrouparenot indicativeof futurereturns.AnyandallinformationprovidedbyBruceBergerisprovidedsolelyforeducationalpurposesanddoesnotconstituteprofessionaladvicewithrespecttohiscredentialsasaCertifiedPublicAccountant,CertifiedFraudExaminerorCertifiedValuationAnalyst.



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Copyright © 2016 Bruce Berger CPA CVA CFE. All rights reserved. Including the right toreproducethisbookorportionsthereof,inanyform.Nopartofthistextmaybereproducedinanyformwithouttheexpresswrittenpermissionoftheauthor.



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The Five Steps To Identify, Buy, And Manage A Portfolio Of Turnaround Stocks: 1.Searchforstocksthataretradingatleast50%belowtheir3-yearhighs

2.Performbasictechnicalanalysistoseeifthesharepriceisformingabaseorbottom

3.Ifabaseisformed,performbasicfinancialanalysistodetermineifthecompanywillsurviveandwhatthefutureearningspotentialis

4.Determineifmanagementinterestsarealignedwithoutsideshareholders

5.Manageyourportfolioofturnaroundstocksusingthestopandreentrymethod



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1. The Search For Turnaround Stocks Thefirststepinyourquestforturnaroundstocksistosearchforstocksthathavefallen50%ormore from their 1 to 5 year highs. This is accomplishedbyusing theweb site FINVIZ or anyother comparable stock screener. FINVIZs website has a free screener that is ideal toaccomplishthissearch.

Duringbearmarketstherewillbeasignificantnumberofstocksshowingupunderthisbroadscreen.Isuggestyoulookthroughthelisttoseeifanynamescomeupthatyourecognize,suchasbruisedbluechipsorbustedgrowthstocks.Afterthisreviewyouwillwanttonarrowthelistfurtherbysearchingforstocksbasedonparticularfundamentalandtechnicalcriteria.Themostimportantcriteriaforturnaroundstocksare:

1. Stockstradingat70%ofbookvalueorless

2. StocksTradingwithapricetosalesratioof70%orless.

3. StockswithInsiderbuying

4. StockswithATechnicalChartindicatingadoublebottomorbase

Inallcases,Isuggestyouchoosestocksthatareabove$1/shandbelow$15/shwithminimummarketcapsof50milliondollars

IsuggestthatyousearchonFINVIZonceaweek.Asyouaggregatestocks,youwanttoputthestocksonawatchlist.FINVIZandYahooFinancehaveexcellentwatchlists.It’salsoagoodideatosegregateyourstocksintowatchlistsbytheindustrytheyoperatein.Thiswayyoucankeeptrackofallthenewsdevelopingwithintheindustry



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2. Technical Analysis The second step inour search for turnaround stocks is toperformsomeverybasic technicalanalysisonthestocksinyourwatchlist

If your stocks are on the FINVIZ or yahoo finance watch list, it’s easy to examine the stockcharts.

Manyvalueinvestorstendtosteerclearoftechnicalanalysis.Theyviewtechnicalanalysistobetoo subjectivewith little predictive value. I could not disagreemore. Technical analysis is aneffort to determine if a stock is being accumulated or distributed, important indicators inlookingatpotentialturnarounds.Technicalanalysisalsoallowsustogaugethepsychologyandemotionsbehindastock’spriceaction.However,likepsychology,itisnotanexacttool.

Overthepast30yearsIhavefoundthatsuccessfulturnaroundstocksrepeatvirtuallyidenticalpatterns.Ihavealsofoundthatfailedturnaroundstocksexhibitedsimilarpatternsthatprovedtobereliablesignalstosellastock. It is importanttorememberthateveryturnaroundstockinvestmentisaneducatedguesswithinawhirlofuncertainty.

Thestocksthatappearinoursearcheswillprimarilybeinseveredowntrends.Ourmissionistofindturnaroundstocksthathavebeeninadowntrendfor1to5yearsandarenowestablishingabase.Thismeansthatthestocksarestayinginatightpricerangeafteralongdeclinedespiterecurringbadnewsoraweakstockmarket.



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Whileperformingweeklyreviewsofyourcharts,youarelookingforspecificpricepatternsthatindicatechangefromtheirlongdowntrends.Thesepatternsinclude:

1. The Double Bottom



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2. A long base



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3. Reverse Head and Shoulders



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4. A Stock Price That Moves To The Right Of A Downtrend Line



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Wewanttoexaminethestockpriceoveratimehorizonthatcoversanywherefrom6monthsto10or20years.Thisisimportantbecausemanystockshaveastrongtendencytodeclinetolowsthatweremademanyyearsprior.Anyofthefourpatternsaboveisapowerfulsignalthatthestockmaybedonewithitspricedecline.

Besides price patterns,we are also looking for a stock’s volume to begin falling as the pricetradesalongabase,orasittestsadoubleortriplebottom.

The price action and trading volume of a turnaround stock often sends important signals.Turnaroundstocksthatdon’tfallfurtheronbadnews,orstayinaspecificrangewithvolumedryingup are sending an important signal that a fundamental turnaroundmaybeoccurring.This indicates thatdespite thebadnews, investorsarebuyingandable toabsorb the sharesfromsellers.Inmyexperience,thisishowbottomsareformed.

Youdonotwantstocksthatcontinuetobreaksignificanttechnicalpricesupportonnonewsorwithearningsreports.Thisissendingasignalthatmorebadnewsislikelycoming.

Mostvalue investorscontinuetobuymoresharesasthepricedeclines.Myturnaroundstockstrategyplanstobuysharesatalowerpriceonlyifthepriceiswithinourbottomingrange.

Buying turnaround stocks in a downtrend is a riskier approach than waiting for signs of abottom.Asmanyseasonedinvestorscanattestto:sharepricescandeclinetounimaginablylowprices.Ilikenbuyingafallingstocktosteppinginfrontoftrain.Myworstmistakeshavecomewhen I ignored this advice and bought a stock in a downtrend before it based. Turnaroundstocksarenothealthycompaniesandeventhoughourfundamentalanalysismaysuggestit’sagoodvalue,wewantthetechnicalstoconfirmthatthestockisnotDOA.

Iwanttoemphasizethepointabove.OneofthemostcruciallessonsIwantyoutotakefromthisbookisforyoutonotletyouregogetintheway.Nobodyknowsmorethanthemarket.Thereisareasontherearesofewvalueinvestorswhoconsistentlybeatthemarket.Evenafterdecades of experienceworking specificallywith turnarounds, it’s impossible forme to knowwitheven50%certaintythataturnaroundwillbesuccessful.Aswewilldiscussinthemoneymanagementsection,it’swisetonotletyouregocontrolyourinvestments.

There isanother importantreasonnottorush intostocksthatare inadowntrend,especiallystocksthathavefallensignificantlywithrecentlyannouncedbadearningsornews.Badnewstypically arrives in three stages. Stocks often start downtrends with their first announcedearningshiccup.Theinitialreactionisasteepfall,whichfindsapricebottomasvalueinvestorsstep in to buy shares, believing the price is cheap in relation to cash flow and earnings.However,what these value investors often fail to appreciate is howprolonged and severe adownturncanbe.



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Whenthenextearningsdisappointmentarrives,thestageissetformoresellingaction.Thesenewsellersconsistbothofthosewhodidnotselloutduringthefirstdownturnaswellassomerecent value investors deciding not to wait out a recovery. Once again, the price decline ishaltedwhennewvalue investors step inandoldvalue investorsdoubledownandbuymoreshares.

The third earningsdisappointment signals to value investors andold shareholder’s alike thatthe problems areworse than thought. Resultantly, the stock falls again as investors give uphopeandsell,regardlessofprice.Atthisstage,apathysets inandhopefullyabasebeginstoformasamajorityofthesellersaredoneexitingthestock.Thepricehasfallensolowthatnowbuyersarewillingtostepinregardlessofthenews,astheybelievethestockhasreachedalowpricecomparedtoitsintrinsicvalue.

Asmentionedbefore, turnaroundstocksare inherently risky.An investorhas toassume thateven if awonderfulbasehas formedand the fundamentals look like theyare turningupwemaystillbeearlyorultimatelywrong.

Youwillneverknowforsureifyouarebuyingatabottom.Thatknowledgewillonlycomeafterthefact.Allwecanaskforisanedgethattheprobabilitieshaveriseninourfavorandthatapotentialbottomisathand.Thisiswhyexaminingthetechnicalsispartofourturnaroundstockbuyingprocess.



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3. Financial Analysis Now that you have found a stock that appears to be bottoming out, you need to perform afinancialanalysistodetermineifthecompanycanbothsurviveandappreciategreatlyinvalueinthefuture.

IbelievethatMurphy’sLawisveryapplicabletoturnaroundinvesting.Ninetimesoutoften,aturnaroundwilltakelongerandbeharderthananticipated,despiteanyassurancesgivenbyamanagementteam.Asaresult,myfirstfinancialanalysisprocedureistoseeifthecompanyhasthe ability to sustain losses or poor cash flow over an extended period of time. Does thecompanyhavewhatisknownasacleanbalancesheet?(Lowdebtinrelationtostockholder’sequity). The number one enemy for a troubled company is debt. Debt is a monster thatconsumescashforinterestandprincipalpaymentsatatimewhencashflowsaredeclining.

Isuggestthatifyouarenewtoturnaroundstockinvesting,stickwithcompaniesthathavenomore than 50% debt to equity ratio. You may also want to look at the balance sheet andexamine howmuch goodwill accounts for total assets. If you see a goodwill balance greaterthan30%of total assets,make sureyourdebt toequity ratio is lower than30%.The reasonbeinggoodwillislikelybewrittenoffifacompanyisexperiencingpoorearnings,reducingtotalassets.

Ournextstepistomakesurethatthecompanyhasenoughcashtosurvivealongdownturn.Dependingonyour levelof financialacumen, it’s idealtoexaminepossiblefuturecash lossesagainsttheexistingcashbalance.Lookatthefuturecommitmentsforcapitalexpendituresandexamine all operating leases. As a company shrinks, operating leases will need to beterminated.Thisforcesacompanytopossiblyuselargeamountsofcashtopayoflessors.

Next, lookatthecompanycredit lines:dotheyhavesufficientaccesstocashinthecaseofacashflowemergency?Ifitlookslikethecompanyhasanadequateamountofcashandcreditavailability,youarereadytomoveontothenextsectionoffinancialanalysis,addressingwhythecompanyisintrouble.

Turnarounds fall into two categories. A company may be suffering due to the change ofconditions in the industry it operates in or the companymay be suffering from a company-specific issue, such as the loss of key customer, management incompetence, or anythingrelatedspecificallytothecompany.

If the company is suffering due to the industry, it is important to understand that industrydownturnstypicallylastfor2to6years.Iftheindustryhasjustbegunitsdownturn,itmaybe



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besttoputthestockonyourwatchlistandperformfinancialanalysislaterevenifitlookslookslikethestockisbottoming.

If the company is suffering due to its own problems, it’s critical to determine if themanagementteamisfocusingontherightstrategies. Inabroadsense,youmustensurethatthemanagementteamismakingsurethecompany’sserviceorproductwillbebetter,faster,orcheaperfor itscustomer. Itoftentakesat leastoneyearforamanagement’steamtohaveapositiveimpactonacompanyexperiencingproblems.

Nowthatwehaveacleanorsolidbalancesheet,adequatecashanda focusedmanagementstrategywewanttoconductananalysisoffutureprofitmargins.Analyzingmarginsallowsustopredict with some accuracy how profitable a business may be in a few years even if thecompanyiscurrentlyearninglittleorlosingmoney.

Margin analysis requires thatwe crunch somenumbers that are contained in the company’shistoricalfinancialstatements.Therearedifferentwaysofgoingaboutthis.Onewayistogotothecompany’swebsiteandprintoutallthe10kand10qreportsoverthepast3to7years.Analternative,tosaveallotoftime,istopayforthedata.IusethewebsiteGuruFocus.Theyhaveafinancialanalysistoolthatwillshoweveryfinancialstatementalongwithimportantfinancialratios and margin percentages including (gross margin, operating margins, EBITDA margins)over a 15-year period. This data saves countless hours of having to go and print out thefinancialstatements.

Thenextstepinourmarginanalysisrequiresaleapofcourage.Isuggesteveryinvestor,eventhenovices,pickup thephoneandcall the investor relationsdepartmentormanagementofthecompany.Ourmissionistofindoutwhatmanagement’sgoalsareforthelong-termgrossandoperatingmarginsofthebusiness.

Get into the weeds of this topic. Try to determine what sales may be in the future. Thecompany’ssalesorrevenuelineintheincomestatementispriceofproductorservicetimesthequantityofgoodssoldorservicesperformed(p*q).Askthemanagementwhat’sgoingonwithpricing.Youneedtogetasenseforthedirectionofpricingoverthenextfewyears.Askhowarecovery in demandwould increase grossmargins. Inquire about the potential for increasedvolume for units sold or services performed. The best scenario is for increased volumewithrisingmargins.Doesthecompanyhavetheabilitytointroducenewproductsandserviceswithhighermargins?

Ask how theyplan to implement their turnaround and look for big changes. Raisingmarginsrequiresdoingsomethingradicallydifferentthaninthepast.Beskepticalifmanagementplansongettingbettermarginswiththesameoldapproach.Remembertoforgetaboutthisyear’searningsandfocusonthefuture



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Don’tworry about being precise in this estimate. Themost important thing is to gain someconfidencethatthereisareasonableplanformarginimprovement.

Thenaskaboutthecompany’sbestandworstcompetitors.Askwhytheirmarginsarewheretheyare.Ifthecompetitorsarepublic,lookattheirmarginsbeforeyourcall.Whatweretheirpeakandtroughmargins?Examinethebestandworstcompaniesintheindustry

Next,askabout thecompany’sSGAexpenses.AgoodturnaroundexecutivewillquicklyslashSGAcosts.However,thereisusuallyafloorastowhatthiscostcanfallto.Ifamanagementhasbeenoperatingforayear,youcanassumeSGAwillstayatthislevel.AskifthecompanyplanstointroducenewproductsandservicesthatmayrequireaninvestmentinSGA.

Theanswerstothesequestionsarecriticalforaturnaroundinvestor.Irealizethatthismaybeintimidating fornew investors,but trustme; it has thepotential to confirmwhy the stock isforminganicebottomorbreakingbases.

With thisdatayouarenowable to calculatea rough sketchofwhat futurecash flowscouldlooklike.Takethepossiblefuturerevenueandmultiplybyfuturegrossmarginpercentagetoget grossmargindollars. Then subtract yourestimate for SGAdollars fromgrossmarginandyouhavearoughprojectionforEBITDAdollars.

Afterthis,calculatethecompanyenterprisevalue(EV).Thisistheequitycapitalization(sharesoutstanding*stockprice)plusthelong-termdebtonthebalancesheet.

ThendivideprojectedEBITDAintoenterprisevalue.Thencomparethismultipletowhatsimilarcompanieshavetradedatoverthepast2to7years.IftheprojectedEBITDA/enterprisevaluemultiple is significantly below the historical or current multiple that similar companies aretradingat,youhaveapotentialwinner.

I also suggest that you examine the company’s historical cash conversion cycle. This statmeasuresthenumberofdaysittakesacompanytocovertitsworkingcapitalintocash.Whileit’seasytomanipulateearningsyoucan’t fudgethecashconversioncycleas itmeasurestheturnover of receivables, inventory and payables. A good turnaround team should be able tomeaningfullydecreasethedaysrequiredtoturnworkingcapitalintocash.



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4. Analyzing Management’s Interests Acardinalruleforturnaroundstockinvestingistonot invest inatroubledcompanyuntilthemanagement team has been changed. Existing management rarely fixes the problems thatwere initiallycreatedundertheirwatch.However,acaveat is ifexistingmanagementownsasignificantamountofstockandareconsideredgoodbusinessman,andthattheinitialdownfallwasaresultoffactorsoutsideoftheircontrol.

Whenacompanyhasachangeinmanagement,anotherlayerofduediligenceisrequired.First,determinewhattheirbackgroundsare.Seeiftheyhaveahistoryofsuccessoriftheysimplygofrom one failing company to another. Inquire if management has any experience in fixingcompanies.

Ihavefoundthatinmanyindustries,badmanagersflowfromonecompanytoanother.Boardsdon’t realize that thebest thing todo is to find someoneoutsideof the industrywhohas ahistoryofsuccessandcanbringafreshperspectivetotheirproblems.

Thenextstepistoexaminetheexecutivecompensationpackage.Newmanagementteamsthatarrivewith insignificant option grants at inception of employmentwill often look after theirown interests and not existing shareholders.With this, there is a higher potential for futureequityofferings anddilution.Managementswith little stockupside alsohave theirmindsonsalaryandbonusinsteadofstockappreciation.

We want to see management with compensation packages that are more closely linked tocompany performance, like equity options, as opposed to fixed payments like salary. Simplyput,themoretheyhaveatstake,thehardertheywillwork.Determiningiftheexecutivesviewtheir jobasapaycheckoraway togenerate significantwealth is a very importantquestion.Experience has shown me that when a management team has skin in the game, they areincentivizedtoworkharderandlookaftershareholders.

Another interesting factor I have noticed is thatwhen newmanagement is appointed, stockpricestypicallyrise.Inaninstancelikethis,Iwouldnotrushinasthestocktypicallycomesrightbackdown.Thisoccursbecauseitoftentakesaroundayearfornewmanagementtodeterminewhattrulyailsacompanyandto“findtheskeletons”.Also,inmostinstances,expectwrite-offsandbigbathaccountingforthe1stand2ndquarteraftermanagementtakesover.



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Another positive hint is if management and directors buy stock with their own cash.Additionally, a sign to exit your position might be these same insiders selling their stockinterests.



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5. Managing your Portfolio of Turnaround Stocks Ihaveinvestedinhundredsofpubliccompaniesattemptingcorporateturnarounds.Ihaveseenasmanyunpredictableturnoutsasyoucanimagine.Ihaveseencompanieswithcleanbalancesheetsandreliablecashflowsturnedtodustascashlossespiledupfromunrelentingdeclinesinpriceanddemandforitsproducts.Ihaveseencompanieswithmediocrebalancesheetsandhorribleoperatinglossesexperienceaturnaroundsowonderfulthattheycouldpayoffalltheirdebt in 5 years. In any case, these outcomes were unpredictable at the beginning of myresearch process. Turnaround stock investing is similar to venture capital investing. We arebetting that a management team can redeploy the assets of a company to generate asignificantreturn.

It’scriticaltonotbecomeattachedtoaninvestmentjustbecauseyouhavecommittedhoursofresearch and/or believe you are right. Even the greatest businessmen can often not save acompany. Forget studyingWarren Buffet, and adopt themindset ofGeorge Soros and PeterThiel.LeaveyourEgoatthedoor.Cutyourlosersandletyourwinnersrun.

Mymethodofturnaroundstockinvestingisverydependentofstoplosses.Intheclassicworldof value investing, stop losses based on technical analysis is akin to heresy. Rarely will aprofessionalsecurityanalystarmedwithaCFA,MBA,orCPAadmitamistakeorplaceastoplossbasedonthepricemovementofastock.

Youalsodon’t findmanyarticlesonstop lossesandtechnicalanalysispostedontheGrahamand Dodd Columbia Business School Newsletter or value investing web sites. The brilliantanalystsandhedgefundmanagersbelievetheyare,withoutfail,alwaysbuyingadollarfor50cents,sowhoneedsastoplossbasedonastockpricechart.Valueinvestorsdonotbelieveinthewisdomofcrowds.Mysystembelievesthatthecrowdsdohavewisdom,atcriticalpoints.All one needs to do to reinforce this point is to examine the stocks of natural resourcecompanies in 2015. In early to mid 2015 value investors thought they were getting greatbargains.Manyofthose50centonthedollarbargainswerewipedoutbyDecember2015.

Similartoaventurecapitalportfolio,10or20carefullyselectedturnaroundstockswilltypicallyyield2 to4stocks thatwill turn into200%to500%winners.Wewant tosell stocks thatarefallingandbreakingkeytechnicallevelsofpricesupportafterourpurchase.Largereturnsarepossibleoveratwotothree-yearperiodifwedothis.Winnerswillmorethanoffsetourlosing



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positions.YouwillseethatPareto’s20/80principalisaliveandwellinthemoneymanagementworld.

For those stockswe sell because the stockprice fell belowa key technical support level, it’simportanttoemployastopandre-enterstrategy.Thereasonforthisisthatwemaysimplybeearlyandnotwrong.Theendofdowntrendscanbeverymessyaffairs.Sinceourfundamentalworksuggestedthepossibilityofaturnaround,youmustbepreparedforawhipsawafterbeingstopped out. This occurswhen the stock goes back up above the critical support line in thechartwhosepreviousviolationforcedustosell.

Stopandre-enter is importantbecausethe last thingwewant is towatch fromthesidelineswhile the stock we just sold potentially zooms to new heights, confirming our originalfundamentalanalysis.Therefore,asmentallydifficultasitmaybe,theonlylogicalstrategyistorebuystocksiftheymovebackabovethepricewesold.Eventuallythisaggravationwillcometoan end as the pricewillmove away from this key zone of support,whether itwill be up ordown.Beingable to reinstateaposition is thehallmarkofa trueprofessional.Amateurswillwhine about the cluelessness of the markets, professionals take it in stride and treat itobjectively.Justliketherealworldofbusiness,investorsmustshifttheirdegreesofconvictionasourindicatorsandfundamentalsshiftandchange.Turnaroundstockinvestingrequiresabitofforethoughtandadynamicplanforcontingencies.

Youwillfindthatengaginginthestopandre-enterstrategyforeachofyourstockpositionswillnot only save youmoney if a turnaround fails, but itwill preserve yourpsychological capitalfromavoiding theemotionalhavocof losinga substantial amountof capital. If 20 to30%ofyourturnaroundstocksgenerate80%ofthereturns, taking losses issomethingoneneedstogetaccustomed to.As investorsarepredisposed toavoid losses, this takes training. Innately,youwill feelmuchworseabouta lossofagivensizethanfeelgoodaboutgainsof thesamesize.Youmustshedthishabitualinstinctinordertorealizeyourfullestinvestingpotential.



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Membersofwww.turnaroundstockinvesting.comhaveaccess toresources thatwillhelpyoudeveloptheskillsnecessarytobecomeasuccessfulturnaroundstockinvestor.

The key is to develop a strong proceduralmemory for the foundations of turnaround stockinvesting.

1. Gaincompetencerecognizingstocksinabottomingprocess

2. Learn how to become proficient studying financial statements in a simple and

straightforwardway.Throughnumerouscasestudies

3. Learn how great CEOs fix companies so you can raise your odds of investing in a

successfulturnaround

4. Practiceemployingthestopandreenterstrategyoneveryoneofyourstocks.



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Case Studies

Cloud Peak CLD CLDisanexampleofafailedbase.Istartedacquiringsharesinthe$6region.CLDhasoneofthefewcleanbalancesheetsamongcoalproducers.Aftera5yearbearmarketIbelievedthatcoal prices were bottoming and that a slight rise in coal prices would dramatically increaseCloudsfuturecashflowsandshareprice.

ThestocksubsequentlybrokeitsbaseandIwasstoppedoutjustbelow$6/shaccordingtomyrules.Thestockiscurrently$2.50/shandIamwaitingforanotherbasetoformtoreenter.Itisnotunusualtobeearly investinginaturnaroundstock. It’sbesttosellandrebuyatthenextbaseratherthanaveragedown,as it’s impossibletoknowifevenastrongbalancesheetcansurviveanindustrydepression.



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Overseas Shipholding OSG

OSGhadbeenonmywatchlistforayearasthesharepricemovedbetween$8/Shand$10/Shafter falling from $85/Sh in 2008. However, the balance sheet had a lot of debt so I stayedaway.Manyvalue investorsownedOSG.WhatwasunknowntoallwasthatOSGhada largeundisclosedtax liability.Thebreak inthebasebetweenMarchandJulywasawarningsignal.Thenextbasewasbrokenbetween July andOct. before the stockwent to zero. Stocks thatbreakbasesaresendingyouastrongsignal.



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Cott

Cottwasafavoriteofvalueinvestorsallthewaydownfrom$12/shto$1/sh.Thestockbrokethroughthreebasesbeforeitfinallybottomed.Animportantsignalwasinsidebuyingwhenthestockwasinits4thbase.Thestockwentontomove1000%offitslows:a10bagger.



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AES Stock Chart

AES is anotherexampleof a stopand reenter. The stockappeared tobebasing from July toOctoberin2002butthenbrokeitsbaseforcingastopout.Thestockthenmovedto97cents.Theidealtimetoreenterwaswhenthestockpricemovedbackabovethepreviousstoppriceknownastheresistancelevel.Atthetime,AESwasahigh-riskinvestmentasitsbalancesheetwas leveraged. However, it alwaysmaintained its strong cash flows. The stock subsequentlywenttoover$20/sh.Inhindsightitlookssillytogothroughthisstopandreenteraggravation.However,hadAESgonetozerothestopandreenterstrategywouldhavebeenabrilliantmove.Thestopandreentermethodprotectsbutalsoallowsaninvestortobepresentifandwhenthestockfinallybeginsitsturnaround.



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Radian Stock Chart

Radianisanexampleofhowoversoldastockcanbecomeinthedepthsofadownturn.Radianwentfrom$60/Shtounder$1/Shintwoyearsduringthefinancialcrises. Itwasafavoriteofmanyvalueinvestorswhodoubledandtripleddownonthestockasitwasfalling.Theyrefusedtobelievethatthemarketknewmoreaboutthecompanythentheydid.Onceagainatcriticalmomentsinacompany’slife,themarketscansendverystrongsignalsthatyoushouldlistento.



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Terra Industries TRA

Terraisaperfectexampleofhowlongittakesanindustrytogofromboomtobusttorecovery.Terraisalargefertilizerproducerthatpeakedin1997anddidnotturntill2003,7years.Asyoulookatthelong-termchartyoucanseethe3-yearbase.Istartedinvestinginlate2000onthedouble bottom at around $1/sh. The fundamental analysis suggested that Terra could earn$1/sh if fertilizerprices returned topast levels.At a10multiple thatwouldequate toa$10futureshareprice.Afterpurchasethestockroseto$5/Shthenbackto$1/Sh.Thepricepatternfor TRA is characteristic of companies that are operating in an industry depression. TRAeventuallyroseto$30/sh.



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Stolt Offshore SOSA

Stolt Offshore was an offshore construction company that had declined due to large costoverrunsonvariousprojectsresultinginlargecashlosses.IbecameinterestedwhenanewCEOcameonboard.Over thenextyear thecompanyannouncedcontinuedwrite-offsandhadtoraiseequity.Despitethebadnews,thestockheldthelowsandabasewasformedwithhigherlows.Thestockeventuallywentover$20/sh.



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Aegean Marine ANW

AegeanMarineisagoodexampleofhowfarastockcanfall.Istartedbuyingasmallamountofsharesat8/shaftertheshareshadfallenfrom$40/sh.At$8/shthestockwasforminganicebaseandreachedthepreviouslowsin2008.However,thislowdidnotholdandthebasewasbroken.Iteventuallyfellto$3.75/Shwhereitmadeaclassicreversaldoublebottom.Thestockeventuallywent to $14/Shwhere I sold it. Aegean is a classic case of how stocks can fall tounbelievablylowlevels.Youmusthaveaplanofhowyouwilldealwiththesesituations.



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HereisachartillustratingthereversaldoublebottomofAegeanwithmycommentsonthedayof thekeyreversal. Ibelievedthecompanywas financiallystrongandatremendousbargain.Thefactthatthestocktriedtobreaktonewlowsandmadeareversalwithnonewstoldmethatstrongsupportexisted.Thiswastheexactbottom.



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Hanger Inc HGR

HGRisasupplierofprosthetics.Thecompanyranintotroubleasitsrollupacquisitionstrategyfaltered,leadingtodecliningearningscausingconcerngiventhecompany’shighleverage.Myfundamentalanalysistoldmethatcashflowswouldremainstrongandthesharepricewasverycheap.Ascanbeseenonthechartawonderfulbasewasformed,withagapupoffthelows.Thestocksubsequentlywentover$30/Sh.



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Hereisaclose-upforthebottominHGR.Youcanseethetriplebottomandthegapoffthelows



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Teekay Tankers TNK

TNKTeekayTankers isanexampleofanice tightbottomwhere thepricealsomoved to theright of the downtrend line. As the bottom was forming, the fundamental outlook for oiltankerswas bleak. Itwas impossible for even themost experienced tanker owners to knowwhendayratesandvesselvalueswouldbottom.However,Teekayhadasoundbalancesheetwithfinancialsupportfromitsparentcompany.Fundamentalanalysisindicatedthefuturepeakearningscouldriseto$1/shifrateseverrosetojust50%ofpriorpeakrates.Thestockroseto$8/shin2015fromthelowsof$2.15/Shin2013.



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Ford Motor F

Fordisaclassicexampleofastopandreenterdoublebottom.UponFord’stestoftheseconddoublebottom itbroke the lowsof the first test. This forceda stopout.However, the stockquickly reversed and the position was reentered. I point this out to show how a stop andreentryinvestingstrategyrequiresabitofplanningandawillingnesstobeokwithwhipsaws.



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Alpha Natural Resources ANR

ANR is an examplewhere I stopped and reentered in the stock four times before the stockultimatelywenttozero.Fundamentally,ANR’sbalancesheetwasleveragedbutithadalargeamountofcashandsalableassets inrelationtothedebt.However,thedecline incoalpricesbecamesoseverethatANRbegantogeneratenegativeEBITDAlossesthatIdidnotexpect.Thestock never stayed within a base. Unfortunately, we will only know if we are correct inhindsight.The lesson fromANR is tonever letyourconvictions in the fundamentalsoverridethetechnicalsandrushintoastockuntilithasformedasolidbaseorbrokeadowntrendline.IthoughtIwasgettingafabulousvaluesoIviolatedmyrules.Thestockpriceactionwastellingthosewillingtolistentostayaway.LosseslikeANRwillshowupagainandagaindespitealltheresearchyouperform. It’s thenatureof turnaround stocks.Our systemallows for losses likethisthough.



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Pulte Home PHM

PulteHomesPHMisperfectexampleofhowfrustratingturnaroundstockscanbe.PHMwasavictimofthegreathousingbubbleasitssharepricefellfrom$48/Shin2006to$8/Shin2008.ForthenextthreeyearsPHMfoundsolidsupportat$8/Sh.Fundamentally,PHMhadadequateresources to survive the bust. However, starting in late 2010 the stock started to break thestrongbaseat$8/Shin2011andthenhadnumerousstartsandstopstryingtogetbackover$8/Shbasewithnumerouswhipsawsofbuyand stops. It then crashed to$4/Sh. Thosewhostopped outwere quite happy. However, as is the casewithmany turnaround stocks, PHMstartedtorisebeforeanyonecouldseetherecovery.Forturnaroundinvestorsthisputsus inthehornsofadilemma.Thelastthingyouwantistoseethestocktakeoffwithoutyou.Youhavenochoicebuttoreenter,thequestioniswhen.Youcandoitatfirstreentrysignalormoreconservatively,waitforittoreachandriseabove$8/Sh.



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Beverly Enterprises BEV

BeverlyEnterprisesBEVwasanursinghomeoperatorthathadexperiencedfallingcashflowswhen the government cut subsidies for the industry. Fundamentally, I believed thatreimbursementswouldhavetoriseinthefuturesomepoint,andBeverlyhadtheresourcestosurviveamultiyeardownturn.Thestockappearedtobeformingadoublebottomat$4/Shbutwasstoppedoutasthebasebroke.Thesharesthenwentdown50%to$2/sh.Thestockthenwentontoformanotherdoublebottomwithinsiderbuyingwhichprovedtobeagoodreentrypoint.Thestockeventuallywentto$12/sh



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Western Refining WNR

WesternRefining isa similarpattern toTNK.WNR isa refiner thatwent throughan industryrefining depression from 1987 to 2010. It stayed in a long base for close to two years.Fundamentally,WNR’sbalancesheetandcashflowsweremarginallystrongenoughtosurvivethedepression.However, itwasnotanobrainer tobuysharesat the lows,asnooneknewhow longrefiningmarginswouldstaydepressed.Despitebadnewsquarterafterquarter thestockhelditslows.



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ThischartgivesabetterpictureoftheWNRbase.Youcanseehowitroseoutofthisbaseandneverlookedback.EachtimeWNRapproachedthelowsinthebaseitlookedlikeitasgoingtobreak.Aninvestorcanneverknowforsure.Thatiswhythestopandreenterstrategyworksforturnaround stocks. If refining margins had not improved WNR stock price may have gonesubstantiallylowerandthestopwouldsaveaninvestor..

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How To Create Wealth Investing In - Turnaround Stocks