The Peter Lynch Investor » Newsletter » Two turnaround candidates for your watch list
road with u turn in mountains

Two turnaround candidates for your watch list

Darcy Paterson

Oct 4, 2023  

If there’s one thing I’ve learned in my many years of investing it’s that turnaround stocks can be great investments. In 2013, I bought Activision (ATVI) after it was discounted by Wall Street for not having any mobile game titles. I made over 400% returns on that trade. I’ve also kicked myself for not having the courage to keep Chipotle Mexican Grill (CMG) after its fall. Oh, the money I could have made!

Anyways, I learn from my mistakes by reminding myself the time to buy is when good companies are struggling. Here are two I’m keeping on my watch list.

Weight Watchers International (WW)

Once the “go to” name in weight loss the brand since seen itself being outpaced by other methods of losing weight… namely Ozempic.

In case you don’t know, Ozempic is a popular drug that helps with weight loss. People’s interest in the drug is clear since it doesn’t require any effort in exercise or healthy-eating to lose weight. Until recently Weight Watchers used those traditional methods to foster weight loss. However, it’s new CEO, Sima Sistani, has the company pivoting towards the new drug-assisted formula for staying thin.

Time will tell if the pivot works out for Weight Watchers. The stock is up over 100% year-to-date which suggests investors are speculating it will. Still, the sales and earnings numbers have yet to materialize which is why I’m still keeping this in my watch list.

3M (MMM)

Another turnaround candidate is 3M.

It’s been hit hard lately because of product negligence. It just settled a lawsuit on defective ear plugs. There’s still some threat of liabilities stemming from the “forever chemicals” lawsuit. However, if the company manages to steer clear of any further issues there may be some reason for hope.

3M’s products extend across the globe and it’s hard to describe just how enmeshed they are with modern life. Sticky notes are just the tip of the iceberg for a company that states it has over 60,000 products.

The company also has plans to spinoff its healthcare division. 3M would still own 19.9% of the new company. The healthcare unit is said to make up 25% of the revenue for 3M. The spinoff is said to be happening by the end of 2023 and there’s a good chance I’ll be adding it to my watch list.

3 year chart of 3M and Weight Watchers showing price, EPS and revenue.

Like I said before, both companies are turnaround candidates with lots yet to prove. You can see sales at Weight Watchers are bottoming but earnings are improving. 3M’s average p/e ratio over the last 5 years is around 18 but it’s forward p/e ratio is 10.

One last bit of wisdom I’ll leave you with in regards to turnarounds is the importance of waiting for the turnaround to gain momentum. There’ll be lots of time for you to buy into it so there’s no sense in getting too eager in what could be a dud. Patience is key.