Bruce Kaser
Bruce Kaser, editor of the Cabot Turnaround Letter, Lexington, Massachusetts. He has more than 25 years of investing experience including overseeing value mutual funds for major fund-management companies. CabotWealth.com
Sometimes companies are so damaged by supply-chain meltdowns, class-action lawsuits and other crises that investors see nothing but catastrophe even though the stocks are dirt cheap. These “turnaround” situations carry a ton of risk but also are more likely to be mispriced than other stocks. If the companies can stem the bad news, their stock prices can surge. My favorite turnaround stocks now…
Bayer AG (BAYRY) manufactures pharmaceuticals and consumer-health goods, as well as agricultural seeds and crop-protection products. Five years ago, it bought US agrochemical company Monsanto and its flagship weed killer Roundup. The $66 billion acquisition turned into a debacle—Bayer was hit with thousands of lawsuits alleging that Roundup caused cancer. Its stock price was cut in half over the past five years. Recent share price: $16.84.
Turnaround potential: The company’s legal liability for Roundup is likely overestimated. Health regulators in the US, Europe and other major countries have concluded that glyphosate, the chemical in Roundup, is not carcinogenic. Despite the Roundup crisis, Bayer continues to generate billions of dollars a year from brands including Aleve, Alka-Seltzer, Claritin and the stroke-prevention pill Xarelto. A capable new CEO takes the helm this June. Activist investors are pressing the company to split up, which could drive shares higher. Bayer’s ADRs trade at a low 7.6 times earnings.
Goodyear Tire (GT). Since the pandemic, almost everything has gone wrong for the largest tire manufacturer in the US. It became the pandemic poster child for supply-chain and manufacturing challenges. Demand for new tires was sluggish due to slowdowns in auto manufacturing, plus inflation and high oil prices increased tire production costs as well as transportation/shipping expenses. Last year, its stock plunged 54%. Recent share price: $10.91.
Turnaround potential: Goodyear’s problems could linger for months, even years, but are solvable. When inflation and energy costs moderate, it should alleviate Goodyear’s cost pressures. Its 2021 acquisition of competitor Cooper Tires strengthens its presence in the US and Chinese replacement-tire markets. Also, management is ramping up capital spending to develop new products designed to meet the booming need from electric vehicles. Shares trade at a low six times post-turnaround earnings.
