Wednesday, February 22, 2023

How to Spot a Successful Turnaround

By Whitney Tilson (View Archive)

Not all declining businesses are 'value traps'...

Companies stuck in an extended decline often make the smartest, best-performing value investments.

The difference is that these companies successfully stabilize their business and then start to grow again.

One form of a turnaround is identifying a company in a sector that is getting crushed.

Take retailers, for example...

While Home Depot (HD), Walmart (WMT), Costco (COST), and a handful of others have figured out how to successfully compete with Amazon (AMZN), most other companies in the sector haven't.

Starting in 2018, the stocks of many retailers – mall-based ones in particular – began to collapse. Sears, Toys "R" Us, J.C. Penney, and Payless ShoeSource closed thousands of stores and/or filed for bankruptcy. Companies like Macy's (M), Nordstrom (JWN), Chico's FAS (CHS), Tailored Brands, and GameStop (GME) saw their share prices cut in half... or more.

Most of these companies will never recover. They're classic value traps.

But one retailer that looked like it was headed for the trash heap has successfully turned things around...

Several years back, shares of electronics retailer Best Buy (BBY) had fallen from the $60s down to around $10. Its largest competitor – Circuit City – had gone bankrupt and closed its remaining stores... and it looked like Best Buy was going to suffer a similar fate.

The company runs a low-margin, high-volume business. Unlike a book – which costs $25 and is identical whether you buy it on Amazon or at a bookstore – most of Best Buy's products are expensive, complex pieces of technology: big-screen TVs, computers, smartphones, and home audio equipment.

Lots of people are willing to buy these kinds of products online. But many others need a bit of handholding. They want to talk to a sales rep... touch and feel the product... and try it out before they buy it. That played to Best Buy's strengths.

The company also had an ace up its sleeve with the so-called "Geek Squad" – employees who could help fix any tech issue its customers had, from removing a computer virus off a laptop to coming to your house and mounting a TV on your wall.

In 2012, with its stock down and out, Best Buy brought in a new CEO by the name of Hubert Joly. Joly had his work cut out for him... but he made all the right moves.

"The strategy is very simple," he told the New York Times when he first took the job. "We believe that price competitiveness is table stakes. The way we want to win is around the advice, convenience, service."

Under Joly, Best Buy rolled out a price-match guarantee to combat Amazon's low prices... offered extended warranties on products... trained his employees to help walk customers through important purchasing decisions... and maintained a focus on the Geek Squad.

The reality is, even with the price-match guarantee, you're still paying a higher average price at Best Buy because the store nickels and dimes you... Best Buy may match the price on the TV you're buying, but then the cable you need costs $20 in store, versus $5 on Amazon. That's an extra $15 in Best Buy's pockets.

The warranties are even more lucrative than the accessories. In most cases, it's a total waste of money and a borderline scam. But it's pure profit for Best Buy.

Best Buy is making a lot of money selling high-margin cables and unnecessary insurance.

All of this translated into a quick turnaround. Shares tripled in 2013 and by 2021, the stock was up nearly 1,500% from its pre-Joly lows...

In this case, the key was to look for a stable company with a big revenue base that was bringing in a new CEO with a new strategy to differentiate itself from its competitors.

When you can find a company that fits that description, with a bombed-out stock and terrible sentiment, you might be on to something. If the company merely stabilizes, the stock will be an easy double. And if you're right and the business does turn around, you'll make five or 10 times your money.

My team and I are currently bullish on one such turnaround in a particular corner of the market...

It's an opportunity that I'm calling the "1,000% Windfall."

For the first time ever, Empire Financial Research is going "on location" – I hired a full film crew to capture every detail of how this "windfall" opportunity works... and how you can use it to potentially make 10 times your money back, perhaps in 12 months or less.

This is the investing story of the next year. We captured everything we could uncover, and we got it all on camera.

We're going "public" with a full investigation into this "1,000% Windfall" tomorrow at 1 p.m. Eastern time... But right now, you can get a special "sneak preview" – and put yourself on the list to be alerted when we release the investigation in full – right here.

Best regards,

Whitney Tilson
February 22, 2023