F. Scott Fitzgerald once said “There are no second acts in American lives.” Yes, but are there second acts for American stocks? That’s the question we here at Equities.com have posed with our Turnaround Stock Portfolio. For those of you who haven’t been following its progress, we’ve put together a portfolio of companies that are in dire need of that second act. But, unlike our portfolio of companies with funny or clever ticker symbols, we brought a specific set of criteria with us this time. Stocks that, as of September 25, had lost value on the year (or lost significant value over the last two years), but had undergone a major change and potentially possessed the fundamentals to mount a comeback. Because no matter what Fitzgerald says, America loves a comeback.*
Last week saw our Turnaround Stocks posting modest gains, but gains nonetheless. The portfolio was up 6.56 percent in a little over a week, and this despite the moribund performance of J.C. Penney (JCP) . But that was before this happened. Tower Group’s (TWGP) post-earnings report plunge hurt us, and hurt us bad. Losing over 40 percent of its value in a single day, and adding to losses since, Tower went from being marginally down to losing over half its value since the start of the portfolio.
On the whole, the portfolio lost 7.33 percent since this time last week, with Tower being the primary culprit (down 48.48 percent over the week), but Zynga (ZNGA) and JC Penney not helping much (down 7.59 percent and 8.6 percent respectively).
Component Spotlight
As we continue tracking the progress of our portfolio, we’ll be profiling some of these companies to give you an idea of why we felt they warranted inclusion. This week, we’re examining our picks for Health Care, Services, and Utilities sectors.
Health Care Sector Pick: Synergy Pharmaceuticals (SGYP)
In a year marked by success for biotechnology firms (the iShares NASDAQ Biotechnology Index Fund ($IBB) is up over 45 percent in 2013), Synergy, a company focused on developing drugs that treat gastrointestinal disorders and diseases, has managed to buck the trend. The company’s stock plunged in value after it offered an additional 16.375 million shares at $5.50 a share, raising some $84.5 million. It was a necessary move. The company has no revenue. That’s right, zero revenue. Without any approved drugs, Synergy doesn’t have any money coming in. And the May 9th release of its Q1 earnings report revealed that in the quarter ending on March 31, the company had lost $18.7 million, or $0.26 a share, exceeding expectations and double what the company had lost over the same period a year earlier.
Why we picked Synergy Pharmaceuticals:
Like any small cap biotech, the real future of the company lies in its product pipeline. If the drugs that Synergy is currently developing show results in their clinical trials and receive FDA approval, the company will have actual revenues, and big ones. And Synergy’s product pipeline does appear promising. Plecanatide is a guanylyl cyclase C (GC-C) receptor for to treat chronic constipation and constipation-predominant-irritable bowel syndrome (IBS-C), and SP-333 is a second-generation GC-C receptor agonist for treatment of gastrointestinal inflammatory diseases. Whether or not these drugs will be approved is, as always, a crap shoot, but should they prove successful it could mean big things for Synergy.
Services Sector Pick: Weight Watchers International, Inc. (WTW)
Weight Watchers shares aren’t nearly what they used to be, losing some 25 percent of their value since the start of the year. Which is ironic, because most of their clients would give their right arm to get to a weight loss of 25 percent in less than a year (it should be noted that, while it might get you there, amputation is not one of Weight Watchers promotes). The company’s most-recent spat of issues came with the replacement CEO David Kirchhoff, who had spent half almost of his 14 years with the company as its CEO, with President and COO James Chambers. This was less a reflection on Chambers and more on the earnings report that coincided with the announcement, which showed a 16-percent decline in net Q2 income and lowered the company’s full-year guidance.
Why we picked Weight Watchers:
Weight Watchers is a stock that’s clearly let itself go, letting bad habits slip in. But the company’s decided that it’s going to do something about this state of affairs and take action to improve itself by…putting on weight (or value, as it were). A new CEO could inject some much-needed new thinking into the company, and much of the drop in income from Q2 was connected to early extinguishment of debt. While there’s clearly headwinds in the form of dwindling membership and global engagement, new leadership could provide the sort of emotional support that could help this his company really start looking and feeling good again.
Utilities Sector Pick: Atlantic Power Corp (AT)
Investing in utilities isn’t really expected to be sexy. There’s very little volatility, a very low chance of snagging really big returns. But there’s usually a pretty solid dividend in it for you, right? Of course, if the utility company you’re invested in decides to drastically cut its dividend, that’s liable to make you sell and sell quick. Well, said conventional wisdom played out pretty much as expected for Atlantic Power when it announced a 65 percent reduction in its monthly dividend in late February, dropping it from from $0.096 a share ($1.15 a year) to $0.033 a share ($0.40 a year). Now, even at $0.03 a share Atlantic’s coming in at a healthy 8.46 percent yield, but that’s only after you consider the nearly 50 percent decline in Atlantic’s value that came in the eight days following the announcement.
Why we picked Atlantic Power:
Simply put, the underlying health of the company clearly didn’t change. It’s the same Atlantic Power now as it was before, only now it’s offering shareholders less money. And while that’s clearly not going to be popular with shareholders, it could also mean a buying opportunity for those willing to look at Atlantic as a “glass is half full” proposition. With the lower dividend meaning a stronger balance sheet, and EPS growth up by over 40 percent this year, it’s possible that share could at least partially rebound in value if the company shows progress.
Turnaround Portfolio Performance Check-In
Here's a look at the portfolio's overall performance since September 25:
Portfolio Return since 9/25: -5.42 percent
S&P Return since 9/25: -0.29 percent
Tower Group acted much less like a tower and more like an underground bunker this last week, pulling the whole portfolio down and erasing the impressive performance from Quicksilver Resources (KWK) . So here's hoping this is just the first act of our made-for-Hollywood redemption story.
*We make no assumptions about what may or may not happen to this portfolio going forward, nor do we advocate investing or not investing in these stocks. Investors are expected to do their own due diligence and consult professionals before sinking their money into anything.
Our interest is purely academic, and we made the Turnaround Portfoilo for our own amusement. We are easily amused.
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