Some Turnarounds Have More Snap

Coca-Cola (KO - commentary - Cramer's Take) is a struggling top-tier company that probably never will get outrageously cheap. By my calculations, Coke currently is selling at its biggest discount to the underlying business value since 1990. Trading around $41 per share, less than half its 1998 high of more than $88, the stock is not "damn cheap" by conventional measures. It sells around 20 times 2005 earnings with a dividend yield of 2.5%. That's as cheap as Coke is likely to get.

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Turnarounds that involve lower-quality businesses represent a very different investing opportunity than ones involving top-tier companies. Investing in these lower-quality companies requires much more investor fortitude and patience. The price rubber band can get stretched far beyond the bounds of reason. The reward, of course, is outsized capital gain potential.

I still like and own Wild Oats (OATS - commentary - Cramer's Take), a turnaround that I wrote up a few weeks ago. Since then, it has traded down from $8 per share to about $6.75.

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That sort of price volatility should be expected for a lower-quality small-cap name like Wild Oats. The price rubber band is much more elastic for a company like this, and the price can stretch considerably farther than you might realize.

For example, the price of Wild Oats stock has fluctuated between $4 per share and $26 over the last five years. That's a wild ride, to be sure, but it's also part of the game of investing in lower-quality turnarounds.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Wild Oats to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At time of publication, Alsin and/or ACM was long Wild Oats, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail].