Shrewd investors find winners among losers

Andrew Leckey

January 08, 1993|By Andrew Leckey

Some see the cup as half full.

A dramatic rise in corporate failures and near-failures in 1992 led to success for shrewd investors able to ferret out eventual survivors.

Some distressed companies are, after all, good companies that simply got squeezed in the recessionary cycle. The trend of seeking winners among the losers should continue strong in 1993 as the U.S. economy slowly improves.

Those with a knack for selecting stocks or bonds of the "right" troubled companies have reaped rewards:

* The model portfolio of the Boston-based Turnaround Letter, which emphasizes out-of-favor stocks and bonds, gained well over 50 percent in 1992 to lead all investment letters.

"You buy bonds during bankruptcy and then stocks as a firm comes out of bankruptcy," explains George Putnam, editor of the Turnaround Letter, who warns against buying shares as a

company goes into bankruptcy, because they usually become worthless.

Putnam says he's "not looking for a dramatic improvement in the economy in 1993, so I see continued opportunities among troubled companies."

* The $1.7 billion Fidelity Capital & Income Fund of Boston, which invests in bonds of bankrupt and distressed companies, had a portfolio gain of better than 25 percent in 1992.

"I see economic recovery helping these troubled companies as they right themselves," says David Breazzano, portfolio manager. "While 1993 won't offer as many great investment opportunities as 1991 or 1992 did, it will be a good year."

* Securities firms specializing in troubled companies doubled and tripled their investments in companies that many analysts thought dead.

"There's often inefficiency in the evaluation of troubled or bankrupt companies by conventional research firms," notes David Millison, director of research for Los Angeles-based Dabney/Resnick & Wagner. "Many troubled companies, with the proper reorganization, offer excellent long-term prospects."

Some of Putnam's long-term successes include Offshore Logistics, a troubled drilling firm purchased at 75 cents a share in 1986 and now worth more than $10. He intends to sell when it reaches $15. LSB Industries, a chemical conglomerate bought in April for $2.50 a share, is around $7 and could hit $18.

"This should be money you're willing to lose," cautions Putnam. "I recommend buying six or eight issues to diversify your risk."

Putnam is fond of Lamson & Sessions, the $5 stock of an out-of-favor maker of electrical conduit for plastic tubing and sewer pipe, whose prospects should improve when work be gins on the U.S. infrastructure.

For the speculative, he recommends truck-maker Navistar International, around $2 a share but capable of $5 a year from now "so long as it avoids a small chance of bankruptcy."

In bonds, he likes Macy Department Stores' 14.5 percent senior subordinated debentures due in 1998, selling for 25 cents on the dollar but capable of reaching 60 cents. It's too soon to buy shares of troubled giants such as IBM or General Motors, he believes, but they may look good a year from now.

(The Turnaround Letter, Suite 801, 221 Friend St., Boston, Mass. 02114, is a monthly with annual subscription rate of $195. According to the Hulbert Financial Digest, which tracks newsletter performance, it had a 56 percent gain in 1991, which it bettered in 1992.)

Biggest holdings of Fidelity Capital & Income Fund include bonds and preferred stock of Unisys and mortgage bonds of Bally's Grand. Portfolio manager Breazzano believes a fund like his offers diversity.

"We're also active in the negotiating of the restructuring of the firms with their attorneys," he notes.

Last year, Millison profited from bonds of Federated Department Stores, which were converted into equity. Bought at $10 through the bonds, a share is now worth $18 and could reach $25. Bankrupt Interco Inc., owner of Converse and Florsheim footwear, was bought at $7 and is now $9.50, with a target of $12.

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