Investing

5 Beaten-Down Turnaround Candidates for 2018

Jon C. Ogg

Published: January 9, 2018 7:35 am

Last Updated: January 12, 2020 4:41 am

Now that 2018 has gotten off to a strong start, many investors are wondering exactly where they should be committing their funds in the months ahead. This raging bull market in the stock market is now nearing nine years old. One trend that has served investors well, at least in the major indexes, is to buy any pullbacks. That has unfortunately not been true when it comes to the stocks that are among the weakest links in the market.

2017 brought gains of 25% in the Dow Jones Industrial Average and more than 19% on the S&P 500. The major stock indexes outperformed every single strategist’s expectations by a wide margin in 2017, and now most strategists are calling for even further gains in 2018 on the heels of tax reform and accelerating growth of earnings and gross domestic product.

For the 24/7 Wall St. base case of the Dow heading towards 26,500, as well as 2,850 on the S&P 500, it will require at least some participation from some unexpected areas. That’s where some of the battered stocks that can be turnaround candidates can come into play.

24/7 Wall St. is featuring several turnaround stocks per day during the first full trading week of 2018. Some of these companies have been severe disappointments for Main Street investors trusting the companies. Some of them may simply be unable to turn around in a fashion that will please the equity investing community. After all, who wants to be forced into taking a 50% (or 75%) loss without any recourse?

Additional trading data and commentary have been offered up on five turnaround candidates for 2018. Consensus estimates have been provided by Thomson Reuters. These are five turnaround stock candidates for 2018, and there are currently a total of 20 that are going to be covered for the week.

Advance Auto Parts: Is Its Death Grossly Exaggerated?

Advance Auto Parts Inc. (NYSE: AAP) was down about 41% in 2017 on fears of Amazon and the multichannel trends hurting the company. With gross profit margins above 40%, the auto parts retailer is still expected to grow sales in 2018 and in 2019. Advance Auto Parts used to have one great chart and great growth trajectory, until the online fears of the Amazon threat.

After a week of trading in 2018, it seems that at least some of the death of retail has been blown out of proportion. If Advance Auto Parts manages to keep growing and showing that it can do even better, then it is very possible that investors will see a better thesis for this and its rivals. At almost 19 times expected earnings, the company is currently valued more or less in line with the S&P 500 already.

Trading at $99.69 at the end of 2017, Advance Auto Parts has a 52-week trading range of $78.81 to $177.50 and a consensus analyst price target of $110.17. Its market cap is $7.3 billion, and it pays a dividend yield of 0.2%. Its shares were last seen trading at $111.39, after a week of trading in 2018.

Bed Bath & Beyond: Dirt Cheap, but for Reasons

Bed Bath & Beyond Inc. (NASDAQ: BBBY) shares are down by roughly half in the past year, but the story is far worse over a longer period. Its stock was nearly $80 a share in late 2013, and the stock is now closer to $20.

Bed Bath & Beyond has become so hated by investors that even meeting or beating earnings estimates is not good enough. That was the case even in recent weeks. Its model is susceptible to Amazon and a slew of others, and there are concerns that its margins are likely to contract endlessly. Bed Bath & Beyond’s most recent quarter demonstrated how no investor wants to hear it. Still, at six times current earnings and eight times expected earnings, there is a chance that a private equity buyer might consider a shot here, now that it is worth so little and now that shares have slid.

Bed Bath & Beyond closed out 2017 at $21.99, after having been an $80 stock in 2013 and a $75 stock in early 2015. Short sellers had been increasing their bets again in Bed Bath & Beyond for most of 2017, but that big bet against it has lightened up in December (18.5 million shares) after peaking in October (at 23.3 million).

Shares of the struggling retailer have a 52-week range of $19.07 to $42.36, and the consensus price target is $22.78. The market cap is $3.2 billion, and the dividend yield is 2.7%. Bed Bath & Beyond shares were at $21.44 after the first week of trading in 2018.

Chipotle: Trying to Move Beyond Montezuma

Chipotle Mexican Grill Inc. (NYSE: CMG) was down about 23% in 2017, and it was given the dubious honor of having one of the worst 20 CEOs in 2017. That’s about to change with new blood to run the company, but the reality is that investors are going to demand that Chipotle demonstrate that it can grow back into a desirable company. This was the poster-child food stock for millennials before it started getting its customers sick. The big problem is not just that Chipotle shares fell to less than $300 recently from about $500 a year ago. The big problem here is that Chipotle’s stock price is down from $750 back in 2015.

For Chipotle to win, it will have to do a better job of convincing customers that it is safe. The sad thing is that if someone catches a cold after having been at a Chipotle in the past week, the company might get blamed. People in America get sick from food-borne illnesses and cleanliness issues every day of the week. Chipotle just has to be able to demonstrate that it is back to way above average and that this is a time to focus on the core brand. Again, it’s a “show me!” story that has to be lived up to.

At $289.00 at the end of 2017, Chipotle shares have a 52-week range of $263.00 to $499.00 and a consensus price target of $317.26. Its market cap is $8.2 billion. Turnaround buyers have committed at least some hope that 2018 will be the big turnaround year. After all, its shares have rallied almost 10% in the first week of the year. Chipotle’s stock was last seen at $318.47.

Frontier Communications: The Final Frontier?

Frontier Communications Corp. (NASDAQ: FTR) was down 86% in 2017, and frankly the company seems to be in something of a hopeless spot. The stock still screens out as paying a dividend yield of 35.1%. That is even after handily cutting its payout from before. For a turnaround to be possible, maybe Frontier needs to consider how it fits into the highly leveraged companies under tax reform and work on fixing that problem at the expense of its dividend.

Analysts see Frontier’s revenue falling to $8.6 billion in 2018 and then to $8.3 billion in 2019, after having been at an estimated $9.1 billion in 2017. What if the company manages to slow that bleeding? It seems hard to imagine that a massive return to earnings is likely. Frontier’s balance sheet almost balances out as flat if you back out the $9 billion in goodwill, so it would be a hard guess that it could take on a white knight buyer after shareholders have suffered down to the lows since the 1990s. That being said, a new CEO and a new direction might do what an outside company cannot.

Frontier shares closed out 2017 at $6.76 and have a 52-week range of $6.08 to $57.30. The consensus price target is $13.34, and the market cap is $550 million. The stock was last seen at $7.34 a share after a week of trading in 2018.

General Electric, or General Eclectic?

General Electric Co. (NYSE: GE) was down close to 45% in 2017, and while it was the worst Dow stock of 2017 it got off to a great start. It’s way too soon to see a turnaround early in 2018, but later on in the year this may be more of a turnaround if some things can continue. If not, let’s just say that the pitch-story that newly appointed CEO John Flannery will have is to break GE up into pieces to start over.

Analysts were burned so badly by Jeff Immelt’s tenure, and the post-Immelt period was one in which Flannery simply has not been able to recapture the company’s narrative. It was just too easy to blast GE and its disappointing past. Now GE is valued at closer to 18 times earnings for 2017 and 2018, if the company lives up to these slashed expectations. And oil prices and gas prices have firmed up enough (over $60 a barrel oil) that the Baker Hughes situation (and ultimate exit) may be tenable again. And of course GE stands to win big in the world of jet engines with all of the new planes out in recent years and coming into the fleets in the next decade.

At $17.34 at the end of 2017, GE was trading at $18.28 after a week of trading in 2018. It has a 52-week range of $17.25 to $31.84, and it had a consensus analyst target of $21.99 at the end of the year. The market cap is $150 billion. GE still pays a dividend yield of 2.8%.

A montage of charts from Stockcharts.com for each of these stocks, versus the Dow and S&P 500, over the trailing months has been shown below.