Hunting for Turnarounds

 | Apr 12, 2013 | 1:00 PM EDT
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Some of the best money in the market has been made by investing in successful turnarounds that drive shareholder value.

Probably the best example of this is when Steve Jobs returned to Apple (AAPL) in 1997. His leadership and vision transformed a niche PC player that many thought would soon be bankrupt into a consumer electronics juggernaut that created new product categories. This successful turnaround made the company one of the most valuable in the world and led to massive returns to shareholders.

Another good example was how McDonald's (MCD) elevated new management last decade, renovated their stores, developed new menu items and transformed their brand in unique ways, such as McCafes. In the process the company has delivered returns of over 500% to shareholders during the past decade.

One of the best gainers in my portfolio over the past six months has been Hess (HES), which has gone up about 40%. The catalyst for this performance is mostly due to activist investor Elliott Management. Elliott's agitation has helped to influence the company to sell non-core assets in Russia and to form plans to sell its U.S. oil storage terminals, its oil fields in Indonesia and Thailand, its energy trading business and its network of gas stations. These moves will transform HES into a pure-play oil exploration and production company, which should result in higher growth rates and bring a higher multiple in the market.

I have a couple of these types of plays in my portfolio where I hope to see similar transformations and increases in shareholder value over time. One is Occidental Petroleum (OXY), which is drawing the focus (or ire depending on your perspective) of more activist investors.

Several large investors are pushing to get rid of Occidental's long time chairman, Ray Irani. Occidental has underperformed its peers for some time. The company has not made the strategic moves to unlock shareholder value like their brethren CononoPhillips (COP) and Marathon Oil (MRO), which spun off its refinery assets last year, or the actions that Hess has taken recently.

Occidental's stock popped yesterday as the fight for the boardroom escalated. The company has some large chemical operations and other non-core assets that probably would unlock shareholder value by being sold or spun off. I think it will be the next large integrated energy company that will be forced to make shareholder friendly moves. The stock sells for 6x operating cash flow and also has a 3.1% yield.

The other turnaround in my portfolio is Ruby Tuesday (RT), which is a recent pick up. I highlighted the purchase earlier this month at $7.75 a share in a Columnist Conversation note. The stock is up a buck a share since then but I believe this restaurant chain operator is still going higher. The stock has moved up as it provided upward guidance after earnings recently. The company brought in a new CEO late last year and is implementing a new menu and marketing strategy. The company also owns about 340 of its restaurants with real estate value approximately 70% of its enterprise value. The company could unlock substantial value by doing a sales/leaseback transaction on those assets according to some analysts.

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