How I Invest In Turnaround Situations

Investing is such an interesting activity for me because you’d never really meet two investors who adopt the exact same strategies and viewpoints about investing.

Some investors like to invest in companies that carry extremely low valuations regardless of their quality while others prefer to invest in companies with superior businesses and pay little attention to price. The fascinating thing about all these is that there is no right answer as to what works.

To me, investing is in itself an extension and personification of an individual’s personal ideology and temperament. And in my case, I’m still more comfortable when investing in companies that are in possible turnaround situations.

This is how I might go about looking for turnaround opportunities.

Terrible news

This approach might not be glamorous but opportunities can often arise due to the negative perceptions that the media has about a company or industry. And when there’s such a scenario, it’d be a cue for me to investigate further.

For example, there’s Noble Group Limited’s (SGX: N21) recent tussle with two research firms who have criticised its business – that may pique my interest in the firm.

Elsewhere, the negative news besieging the oil and gas industry might also be something I’d want to look into; as an extension, companies like rig builders, Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51), as well as support services providers, like Ezra Holdings Limited (SGX: 5DN) and Ezion Holdings (SGX: 5ME), might be things I’d want to take a deeper dive into.

The trick is …

However, the trick is to not be tempted to invest in everything and anything that has fallen in price. Although I generate my ideas from perusing through companies or industries with negative sentiment attached to them, I would only invest in less than 10% of the instances I come across.

The key, for me at least, is to only invest in companies with 1) businesses that are fundamentally strong, 2) a clean and solid balance sheet, 3) leadership status in its industry (preferably), and 4) a good track record before the crisis which captured my attention arose.

This is because the mindset which one needs when investing in a possible turnaround situation is very different from that of an investor who’s looking for the best businesses to hold for the long-term. When investing in a turnaround situation,  the key is to avoid possible losers instead of finding the best possible winner.

With possible turnaround situations, the market’s sentiment and perception of the company is already so weak such that any minor improvements in its business might be sufficient for an investor to reap substantial gains from the turnaround. But, if we end up investing in a loser, we might see our investment capital whittle away slowly.

Foolish Temperament needed

I have to admit, investing in turnarounds is not for everyone. You’d need to endure criticism and judgmental opinions from others on why you would invest in such “lousy” companies or industries for years before you might see results. By then most of those who had criticised would have forgotten why the industry and/or company in question was “lousy” in the first place and see an investment in it as obvious.

Therefore, you truly need to be patient and be able to control your emotions when being a turnaround investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Keppel Corporation Ltd.