Looking for Possible Turnarounds

 | Mar 25, 2013 | 11:33 AM EDT
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Andy Grove, the man who helped build Intel (INTC) into one of the greatest technology companies ever, famously wrote in Only the Paranoid Survive that the quarter is a perfectly good unit with which to judge a company's performance. He believes that a company's management can change a lot that needs to be changed and adjust quickly to the new circumstances.

His vision is correct, as we see from many outstanding companies by the day. This morning, Dollar General (DG) reported a terrific quarter, and although the stock had run into the number, it is important to reflect back to the previous quarter and on how gross margin pressure had hurt this very aggressive grower, and how the company was very cautious about the outlook because of a potential price war. The stock got hammered mercilessly as people gave up on Dollar General in particular and the segment in general.

Sure enough, the company adjusted and managed to right the ship within a single quarter. We had no traces of gross margin compression. Instead we had terrific growth and excellent same-store sales. Dollar General is no longer on the must-sell list. It is now on the must-buy list.

We have seen the exact same phenomenon with Best Buy (BBY), where new management came in and began culling bad stores and making improvements within the quarter that changed the outlook for the company's future. The result? A double in no time as investors realized that this company, once a powerhouse, can return to a growth stage, aided by the return of a gentle recovery in housing.

We saw the same thing in Starbucks (SBUX), too, where Howard Schultz promised a turn in Europe despite the Continent's no-growth philosophy, and I am beginning to believe it is a philosophy. And again, we are getting that quick turn in Yum! Brands (YUM), after the disastrous Chinese food scandal.

Neither David Novak, the CEO of Yum! Brands, nor Schultz promised turnarounds as fast as they are occurring, but they are clearly following the Grove dictum of righting the ship in three months' time.

Who else could perhaps steer a company back into a solid path after losing its way? I am wondering whether Christine Day, the CEO of lululemon athletica (LULU), might have an ability to get it right over the next three months. I know I have been harsh about the execution risk here, but we also have to recognize that Day took the extraordinary step of declaring a recall where, perhaps, no recall really needed to occur. The company's integrity shot up because of this incident, and I bet lululemon doesn't skip a beat. Now, obviously, it is highly valued right now, even after the decline, but it wouldn't surprise me if she is from the Schultz school of turnarounds, having worked at Starbucks earlier in her career.

Finally, here's a hard one: Oracle (ORCL). The story is not good. I know, we own it for Action Alerts PLUS, and it has really hurt, even as it is a small position. However, every single time the company has had a disappointment like this, it has managed to solve the problems and trend higher over time. Every single instance. Of course, the cloud represents a long-term challenge to Oracle, and I know Oracle is an expensive company to work with -- hence the cloud's ability to play havoc with the business model. But the record is clear that Larry Ellison has been able to turn things on a dime, or at least on a quarter, so I would not count this company out either when it comes to what could happen in the not-too-distant future. 

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