Everybody loves a comeback. Whether it’s the Little Engine That Could chugging up that hill, or Rocky overcoming the odds in the boxing ring, there’s a real catharsis that comes with watching an underdog succeed.
In fact, tales of comebacks are so pervasive, we all start to believe that those fairytale turnarounds will spring up in our own lives.
That’s a problem — especially for investors.
Investors are often so eager to believe that they have discovered a “diamond in the rough” that they overlook the problems that got the company into trouble in the first place. Some may call it “the power of positive thinking” but more analytical types will recognize it as an example of “confirmation bias” — looking for information that supports your belief and ignoring all evidence to the contrary
The reality is that comeback rarely are a straight shot to the top. Many companies suffer setbacks on the long road to recovery.
Heading into 2015, we decided to take a closer look at some of the more well-publicized comebacks to see which of these little engines will continue to chug along up the hill and which will wind up getting derailed. Here they are, in no particular order.
Stock Comebacks — Best Buy Co Inc (BBY)
YTD Return: -1%
CEO: Hubert Joly
52-Week Price Target: $41.86
When Best Buy Co Inc (BBY) named Hubert Joly as CEO in 2012, the consumer electronics retailer was a disaster. His predecessor, Brian Dunn, was fired for engaging in an inappropriate relationship with a subordinate. Richard Schulze, the company’s founder, was forced from the board after an investigation found he know about Dunn’s activities but kept his mouth shut about it. Schulze then tried and failed to take the company private but abandoned the idea after failing to secure financial backing.
Good thing, too, since Joly has proven to be a pleasant surprise.
Joly has managed to reverse a decline in same-store sales and has dared to take on Best Buy’s arch-nemesis Amazon.com, Inc. (AMZN) when it comes to price. He announced plans to invest $750 million on improvements such as improving the website along plans to slash more than $400 million in costs.
Joly warned that the recovery would be bumpy, which has proved true. Last year’s holiday season was a disappointment, which sent BBY stock into a tailspin. Best Buy, though, has roared back, posting a monster 3rd quarter, including a 22% gain in U.S. same-store sales. As the economy continues to recover, so should Best Buy. With popular products such as Apple (AAPL) iPhones and GoPro (GPRO) cameras, BBY shares have plenty of upside potential.
Stock Comebacks — BlackBerry (BBRY)
YTD Return: -46%
CEO: John Chen
52-Week Price Target: $9.46
BlackBerry has been given up for dead more times than Abe Vigoda. The smartphone maker is such as basket case that when John Chen decided to take the job as the company’s CEO he felt the need to tell Bloomberg News, “I am not crazy.”
BBRY was once synonymous with smartphones, holding 43% of the U.S. market. Since then, it has declined to less than 1%. Nonetheless, Chen, who turned around Sybase, earned plenty of kudos when BBRY posted far better than expected results in the fiscal second quarter. Unfortunately, the Canadian company still lost money in the quarter and doubts emerged again after BlackBerry reported disappointing results in the third quarter.
BBRY has made a huge bet on the BlackBerry Classic, which features the keyboard that fans love along with bigger screen space and longer battery life than an earlier model. But even if the Classic turns out to be a hit, Chen faces the Herculean challenge of convincing iPhone and Android users to ditch their phone for a BlackBerry. Given how loyal people have proved to be to those brads, investors are better off avoiding BBRY stock.
Stock Comebacks — J C Penney Company Inc (JCP)
YTD Return: -29%
CEO: Mike Ullman
52-Week Price Target: $8.28
The recent history of J C Penney Company Inc (JCP) is a long, strange trip. A few years ago, JCP decided that Ron Johnson, who oversaw the development of the Apple stores, was the right person to lead the company into the 21st century. That turned out to be one of the worst decisions in the history of corporate America.
But there’s an interesting side-note to this story that gets little attention: Johnson’s predecessor and successor at JCP was the same person: Mike Ullman.
Since returning to his old job, Ullman has spent most of his time undoing Johnson’s decisions. He has also brought back store brands that shoppers liked and halted a pointless modeling plan. His work has yielded some successes such as earlier this year when JCPenney reported its first quarterly sales gain since 2011.
JCP may be down, but it’s not out, and JCP stock is certainly a buy. The chain expects comp sales to increase between 2% and 4% in the fourth quarter, which may prove to be conservative, given the pickup in the overall economy.
Comeback Stocks — American Airlines Group Inc (AAL)
YTD Return: 112%
CEO: Doug Parker
52-Week Price Target: $60.79
A year ago if anyone had told me that an airline stock — let alone American Airlines Group Inc (AAL), the largest carrier — would double in value even though it hasn’t against oil price fluctuation I would have advised them to seek psychiatric help. But thanks to the plunging price of oil, AAL stock has had the last laugh.
The company’s fortunes seemed bleak three years ago after it emerged from Chapter 11 bankruptcy protection. Nor did they seem particularly optimistic when U.S. Airways and American Airlines announced their merger plans. Again, the impact of lower oil prices cannot be underestimated. A recent report by Bank of America Merrill Lynch estimates that oil prices will bolster airline industry profits by 75% in 2015.
Even though the wind is at the carrier’s back, investors should hold off on adding AAL stock to their portfolio until the merger of the US Airways and American frequent flier programs and reservations are completed. These are massive projects that can go south easily, potentially causing some investors to flee.
Comeback Stocks — Electronic Arts Inc. (EA)
YTD Return: 106%
CEO: Andrew Wilson
52-Week Price Target: $47.54
Before CEO Andrew Wilson took over at Electronic Arts Inc. (EA), the video game maker had fallen on such hard times that it was named the worst company in America by the influential Consumerist blog for two years in a row.
Wilson has adopted what he calls a “players-first” business model, which includes common-sense moves like not rushing games to market. This new approach couldn’t have come at a better time. In 2014, gamers added lots of new EA titles to their collections, thanks to new consoles from Sony (SNE), Microsoft (MSFT) and Nintendo (NTDOY). An improving economy also helped.
During the most recent quarter, Electronic Arts reported a barn burner of a quarter, boosting quarterly EPS from 33 cents to 73 cents year-over-year. The company also saw its mobile revenue skyrocket 64% to $123 million.
Unfortunately, it seems as though the good news is factored into EA stock, which means investors are better off hitting pause rather than play.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
