Are you listening to the markets? They're speaking loud and clear right now. As I said back in September, forget the predictions of pundits who claim that we're headed for a Japan-style deflationary spiral. The evidence provided by the markets suggests that a much different scenario is unfolding.
All eyes should be on the fixed-income market -- specifically the yield curve, the spread between short-term interest rates and long-term rates. The curve is steep (and getting steeper), a solid signal that a more robust economy is forthcoming.
The message of the stock market mirrors the message of the bond market. The recent rally in equities suggests that we've seen the nadir of the economic cycle.
The low in stocks is almost always in the middle of a recession -- never at the end or even in the vicinity of an end of a recession. (Once, in 1976, the stock market low was at the beginning of the recession.) The National Bureau of Economic Research announced Monday that the current recession started in March. (Note that these dates are always subject to change, sometimes a year after the fact.) Assuming the recession lasts a longish 12 months, the halfway point would be, interestingly, September 2001.
In this column, my third installment of the Top 10 Turnarounds for 2002, my picks are two economically sensitive stocks. The market is signaling that an economic rebound will occur in 2002, and I'm listening. Both of these companies are leveraged to the economy.
, a leading air conditioning and refrigeration company with a $1.4 billion market cap and $4 billion in sales, in May. At Friday's close of $36.33, York was up about 20% since the column appeared. However, that price still doesn't come close to reflecting the magnitude of the turnaround at this company.
York has cut $60 million in annual costs through closing plants, laying off workers, discontinuing unprofitable lines and lowering interest expense by paying down debt. Depressed earnings are currently $3 per share. Management is intent on lifting operating margins to 10% from their current 6% level, a possible feat. A better economy and a softer dollar would help, as 50% of sales are international.
With most of the heavy lifting already accomplished, this turnaround stock is safer than most. Expect York to return to historical price levels in the next several months; the stock regularly traded well north of current levels until 1999, when operational difficulties led to a sharp falloff in the shares.
York: A Pretty Safe Play
I've highlighted 31 stocks in the past 12 months for readers, and they're up an average of 26%. However, the picks are far from perfect. Arguably, my worst recommendation was
, with a $5.5 billion market cap and $11.5 billion in sales. That stock was lately down 33% since
my June column.
Textron surprised investors (and me) with bad news at the end of September: The company dramatically lowered earnings guidance for the balance of 2001, announced a major restructuring effort and made several changes in senior management.
Now that Textron is in full turnaround mode, it makes a nice fit for my Top-10 list. I think the worst is behind this company. Textron's management recognizes that its acquisition strategy has been a failure, especially in its fastening and industrial segments (15% and 22% of sales, respectively).
Textron has a strong core business base and a strong financial position from which it can rebuild. Its core aircraft division, led by Cessna business jets and Bell Helicopter, has a decent backlog of business, and its Kautex division, which is the largest maker of plastic fuel tanks, has good growth prospects as plastic tanks continue to take share from metal tanks.
Textron never traded below $40 during the 1997-2000 period. While it's too early in the turnaround to project a target price, I think at its current price below $40, this stock represents an appealing bargain for turnaround investors.
A Turnaround for Textron
A Note on Dillard's
I made a mistake in
last week's column when I labeled
as my "favorite" of the Top 10 Turnarounds for 2002. After further reflection, it was a mistake because a key ingredient is missing from the equation: superb management.
While a hoard of real estate and other assets make Dillard's a deep value stock, the open issue for me is whether management has the wherewithal to handle complex operational problems. Dillard's is still one of my Top 10 Turnarounds, but I'll reserve the distinction of "favorite" for another column -- and another stock.
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM was long York International, Textron and Dillard's, although holdings can change at any time. 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