Perhaps it’s my contrary nature.
While most investors are drawn to market winners, I’m drawn to losers. I’m more intrigued by who hit a new 52-week low (a multi-year low is even better) than who hit a new 52-week high. Show me the company that missed earnings and revenue growth estimates, and that may be the perfect opportunity.
I’m drawn to lagging companies because I understand human nature and economics.
On the former, bad times focus the mind. Talk and time devoted to ancillary diversions – good deeds, charity, stakeholder welfare, the upside of Hacky Sack breaks – subside. Full attention is given to management survival by way of the company’s most important constituent – the disgruntled shareholder.
As for the latter, economics and markets will force change, even if management won’t. Lagging companies draw intense scrutiny. Outside forces will intervene and instigate improvement. Indeed, one of the best performing investments in the High Yield Wealth portfolio is Icahn Enterprises LP (NYSE: IEP). Icahn has developed a successful business model predicated on improvement, whether management goes along or not.
Poor performance combined with the improvement imperative can lead to an exceptional investing opportunity. Poor performance is reflected in depressed share price, but the potential for substantial improvement frequently isn’t. Investors grasp the present, but they fail to anticipate the future.
Of course, exploiting these turnaround opportunities involves more than simply buying laggards. Some sensible contemplation and perceptive forethought is required. No matter how motivated Blockbuster management might have been to be the most efficient videotape and DVD renter on the block, if there are no customers there’s no business.
That said, company can provide meaningful clues to its viability. The dividend is just one example. A company that can maintain its dividend through tough times raises its profile as a legitimate turnaround candidate.
Such was the case with High Yield Wealth recommendation BGC Partners (NASDAQ: BGCP). This large institutional financial and commercial real estate brokerage has returned 85% year to date, and is the top performer in my portfolio. The returns are a product of a high dividend yield and strong share-price appreciation.
A year ago things were much different. BGC had been one of my portfolio’s worst performers. Investors were selling en masse because trading volume across most of its financial platforms was down. On many of its platforms, volume declines were measured in double-digit percentages.
But through it all, the dividend was maintained. I remained convinced that BGC’s business wasn’t going away.
Just as important, management was signaling its motivation to improve operations. Though trading volume remains below historical norms, management offset lower volume with increased revenue from its commercial real estate brokerage division. Today, that division generates 35% of the company’s revenues. Three years ago, there was no real estate division.
Thanks to management picking up commercial real estate brokerages assets on the cheap, BGC’s revenues are up nearly 40%, to $2.55 billion.
More impressive, management negotiated a remarkable sale for one of its trading platforms. In April, the company sold eSpeed to NASDAQ for $750 million in cash plus an additional $484 million in NASDAQ stock based on performance benchmarks over the next 15 years. BGC received more upfront for eSpeed than the entire market value of the company.
Today, BGC is flush with cash – $869 million to be exact. That works out to $4.06 a share, which means two-thirds of BGC’s value is cash. Spectacular turnarounds are possible when management is properly motivated.
Plus, BGC Partners continues to pay a healthy dividend. At $0.48 per share, that translates into a 7.9% dividend yield.
BGC provides an invaluable investing lesson: the importance of patience and maintaining faith in your analysis of a turnaround situation. I never lost sight of either, and today investors who bought BGC are reaping the benefits of buying a big loser.
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