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Collection: Peter Lynch - #42 'Fourth Category of Stocks; Turnarounds'




These are stocks that are battered down or they are hated companies, or they have been forgotten about, they are depressed price. But you have determined some one thing or a few things that have the potential for reversing this company’s fortunes independent of the industry getting better or the economy getting better.

You will always have to do a balance sheet check on any company. This includes turnarounds. Do they have enough cash to make it through the next 12 months or the next 24 months? Do they have a lot of debt that’s due right now? These are important questions to answer.

Make sure you understand and believe in the plan to restore corporate profits. It is all internal. They are doing something, either new product, new management, cutting costs, getting rid of something. Something inside the company that allows them to improve themselves.

Lots of turnarounds never happen, but a few winners can make up for lots of losers. What is important is to wait for the actual evidence of the turnaround occurring, not just the symptoms. The turnaround, you have plenty of time. So just don’t buy on the hope. Wait for the reality. Turnarounds are so big it is worth waiting to get some real evidence.

S.S. Kresge was a company going nowhere and in real trouble. They invented the Kmart formula. They rolled it out across the country. The stock went up over 50-fold. Kmart became a massive stock.



[YAPSS Takeaway]

Look at the Internal and wait for the real evidence to show up before buying into it. Don't buy on the hope.

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