It’s the dream of every investor to find a stock that is down on its luck and ride it higher to riches.
These are the turnaround stories: companies that for whatever reason have struggled but are finding a way to get their groove back.
Who doesn’t wish they had bought Amazon.com, Inc. (NASDAQ:AMZN) at $6 a share in 2002 after the dot-com meltdown when many tech stocks were left for dead? It is now trading near $285 a share.
Yet for every Amazon.com, Inc. (NASDAQ:AMZN), there is a Webvan or a Toys.com.
Neither one succeeded. Webvan and Toys.com no longer exist. Those investors were left holding the bag.
How Do You Separate the Stars from the Duds?
It’s obviously not always easy to invest in the companies that are truly turning around instead of those that are going nowhere.
If it were easy, we’d all be in them.
Thankfully, there are some clues to look out for that will help you find more of these dream turnaround stocks. Here are four to consider:
|1. It’s All About the Good News|
|The first instinct many have when thinking about a turnaround stock is that something must be wrong with it. There must be some kind of bad news associated with the company for it to be trading at a discount. Right?The true turnaround stocks will have a clear, positive, fundamental change taking place that tells you it’s safe to get on board. Perhaps it’s a new management team, product or sales approach that has caused the improvement in the company’s earnings trajectory.
Whatever the case, be on the lookout for this good news that acts as a catalyst for earnings estimates to move higher — and that will lead to a significantly higher share price over time.
|2. Stocks Trading Under $10 = Turnaround?|
|Lots of investors think that a stock in the single digits is somehow cheap and will rebound faster. So it must be a turnaround stock if it’s under $10, right? The answer is WRONG far too often.A low share price does not automatically mean a company is a turnaround candidate. Webvan and Toys.com both traded in the single digits before going out of business.
Don’t get sucked in by a single-digit share price. Your dream turnaround could be trading at $20 or even $200 a share. The key is that the current price is low compared with where it will be in the months ahead.