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5 Favorite Turnaround Stocks for 2019

The Turnaround Letter, edited by George Putnam, III has selected his "Top Five" stocks from his list of recommendations for the upcoming year. Putnam recommends holding a well-diversified group of turnaround stocks because individual turnaround stocks can be risky.

“These five stocks appear poised for the sharpest gains in the coming year. Some have been badly beaten up in the market downturn, while others have a turnaround underway which remains unrecognized by most investors.

Adient plc (ADNT) – The world’s largest maker of car seating is exposed to many of investors’ current fears: domestic and Chinese auto industry downturns, tariffs and a slowing U.S. economy. On top of these, it has self-inflicted operating issues, elevated debt and a suspended dividend. As a result its shares have fallen 79% this past year. Given the highly negative sentiment, even a modest lifting of the macro issues would be favorable to the shares. The company's competitive positioning is strong, and we don't expect demand for new autos to collapse. Adient’s internal problems are fixable, with a well-matched new CEO focused clearly on making needed changes.

General Electric (GE) – Following the company's jaw-dropping fall from the pinnacle of Corporate America, GE is a chastened company determined to work its way back from the brink. Its highly-capable new CEO is rapidly taking remedial action. The company has filed to spin off its healthcare unit, and it is divesting many of its other operations and ownership stakes, including Baker Hughes. In addition, GE has announced a split-up of its struggling Power unit, replaced another board member and is replacing its long time independent auditor. While there are still many uncertainties and risks ahead, the company appears to be finally moving in the right direction. Its heavily sold stock appears to reflect all but a worst-case scenario.

• Janus Henderson (JHG) – Shares of this $378 billion (assets under management) investment manager have been weighted down by concerns from weak mutual fund performance combined with clients’ growing preference for ETFs, of which Janus offers very few. Its 2017 merger of equals didn't go as smoothly as expected. However, Dick Weil, who led Janus' prior turnaround, is now the sole CEO, and we believe he will bring improvements to the combined company. Most compelling is Janus' valuation, at a very modest 6.8x earnings and 3.7x EBITDA. The company is generating considerable free cash flow and the balance sheet is strong. Moreover, the 7.4% dividend yield looks sustainable.

Midstates Petroleum (MPO) – This small-cap oil and gas producer recently emerged from bankruptcy and now has a nearly debt-free balance sheet. Its board members collectively represent over 38% of the company shares. The tight-fisted new leadership has pared spending to the point where it is approaching break-even free cash flow. The company's hedges offer it some protection from the recent drop in oil prices. As a potential buyer of oil fields, low oil prices should reduce what Midstates might pay for future acquisitions. Currently trading at 2x EBITDA, Midstates looks poised for a strong rebound in the coming year.

Newell Brands (NWL) – This collection of well-known consumer brands is undergoing a complete overhaul. Under the capable watch of activist investor Starboard Value, which has overseen impressive changes at companies like Darden Restaurants and Advance Auto Parts, Newell is divesting 35% of its operations over the next year or so while it improves the margins and cash flow from the remaining businesses. Cash proceeds are already paying down part of its $9.6 billion in debt and will eventually fund the repurchase of up to 40% of its shares, while management plans to maintain its healthy dividend. With its turnaround well underway, we think Newell shares should perform well in 2019.”

Editor’s Note: The Turnaround Letter is a monthly newsletter that makes money for its subscribers by providing investment insight, advice and stock purchase recommendations. Written for more than 30 years by George Putnam, III, The Turnaround Letter has had the longevity and proven track record necessary to gain the confidence of thousands of investors and industry experts. The Turnaround Letter’s full year 2018 Closed Out stock picks produced profits averaging 67%. For more information visit www.turnaroundletter.com.

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