If you watched HBO’s The Wizard of Lies, then you know how powerful a motivator greed is. While investing in money-losing businesses seems antithetical to that instinct, they’re actually some of the best stocks to buy. Why? Because they contain the chance to score big from any potential turnaround. Pure and simple greed.
Peter Cohan, an investor in and consultant for startups, wrote a piece in Entrepreneur magazine from 2013 that wondered if investors will ever learn to avoid money-losing companies:
“But that’s the beauty of the stock story for a money-losing company. If it were making a profit before its IPO, it would be harder to make outrageous forecasts about how much more money the company will make in the future … But when a company is losing money, the sky’s the limit when it comes to predicting how bright its future will be.”
He was speaking about IPOs but I think you get the picture. When a company’s just plodding along growing revenue by 5% annually and making money at the same time there’s nothing exciting about owning its stock.
Owning a money-losing stock that goes from $10 to $100, however, is the ultimate high for many investors. If you’re looking for this level of zen, here are seven money-losing stocks to buy for big turnaround profits.
Money-Losing Stocks to Buy: Marathon Oil (MRO)
Sector: Basic Materials
Oil prices are slowly moving higher and that’s got investors excited about the turnaround possibilities for mid- and large-cap exploration and production companies, such as Houston-based Marathon Oil Corporation (NYSE:MRO). MRO stock is down 25% year to date, trailing its E&P peers by a wide margin. In fact, its stock’s been a loser for the better part of a decade.
What’s changed for investors to jump back into the fray? Oil production that is going much higher. In its first-quarter 2017 results Marathon Oil said it would finish the year with oil production at least 20% higher than Q4 2016. Looking to generate more revenues and profits from its production, it announced in March that it was selling its 20% non-operated interest in the Athabasca Oil Sands Project for $2.5 billion, which accounted for just 12% of its annual production volume.
It’s redeployed some of those funds to acquire 91,000 acres in the Permian basin for $1.8 billion. Marathon Oil is heading into the second half of the year with $700 million in cash and oil assets that are much more productive. Although it lost $16 million before taxes in Q1 2017, it was considerably lower than the $613 million lost in the same quarter a year earlier. Should oil prices remain where they are or head higher, expect Marathon Oil to return to profitability in 2017.
Most importantly, it’s very possible given that it’s generating free cash flow, that it will reinstate some sort of dividend in the coming months. If, that happens you could see $20 by the end of the year.
Money-Losing Stocks to Buy: Coty (COTY)
Sector: Consumer Goods
The beauty business is rocking these days. As a result, the stocks of both Ulta Beauty Inc (NASDAQ:ULTA) and LVMH Moet Hennessy Louis Vuitton SE (ADR) (OTCMKTS:LVMUY), owner of Sephora, are tearing the ball off the cover. Both stocks are up 20% and 35%, respectively, year-to-date.
Coty Inc (NYSE:COTY), which owns brands such as Clairol, Covergirl, OPI, Chloe, and OPI, hasn’t done quite as well up just 5.5% through May 26, but big improvement on 2016 when it was down 27.0%. In October, of last year Coty completed a transformative acquisition buying Procter & Gamble Co’s (NYSE:PG) beauty business for $11.6 billion including the assumption of $2.0 billion in debt.
Coty’s third-quarter report released May 10 showed that P&G through the first nine months of the fiscal year ended March 31, 2017, contributed 32% of the company’s overall revenue. While it lost $159 million in the first nine months of the year due to acquisition-related and restructuring costs, on an adjusted basis it made $683 million.
“On the integration of the P&G Beauty Business, we are making good progress,” said CEO Camillo Pane. “I am confident that the strategies and action plans we are deploying throughout the organization are setting the stage to realize the enormous potential of Coty as a global leader and challenger in beauty.”
The brands it bought from P&G are in better hands and will receive the kind of attention they deserve. I’d look for big things from COTY stock in the next 12-18 months.
Money-Losing Stocks to Buy: Wright Medical (WMGI)
Sector: Healthcare
Anyone who’s got a bad shoulder, elbow, wrist, foot or ankle probably has heard of Wright Medical Group Inc (NASDAQ:WMGI), a Memphis-based orthopedics company. Less than two years into a merger with Tornier N.V., a European company based in Amsterdam, it is a world leader in some of the fastest growing areas of orthopedics.
According to an Oct. 1, 2015, press release:
“Once integrated, Wright continues to anticipate revenues of the combined business growing in the mid-teens and adjusted ebitda margins approaching 20% in three to four years with the cost synergies expected to be in the range of $40 million to $45 million by the third year after completion of the transaction.”
On May 3, WMGI announced its Q1 2017 results which included a $137 million net loss from continuing operations. However, its guidance for fiscal 2017 is right on target to meet its 2015 targets set by the company with revenue to increase between 9%-11% to at least $755 million with adjusted ebitda between $79 million and $86 million, a margin of 11.4%, with two more years to reach those goals.
Although WMGI stock is having a good year, up 28% year to date, it’s dropped off by about 2% in the past month. If you believe that an aging population is going to need its products, I’d consider buying some stock now and some more should it drop into the low $20s.
Money-Losing Stocks to Buy: Terex (TEX)
Sector: Industrial Goods
If you work outdoors on construction sites there’s a good chance you’d be familiar with Terex Corporation (NYSE:TEX), a Connecticut manufacturer of aerial work platforms, cement mixer trucks, cranes, material handlers and many other pieces of industrial equipment.
Terex’s operations lost money in 2016, its first losing year since 2010. Now on the road to reducing its focus to a few basic businesses, it’s either sold or in the process of selling several of its brands including the 2016 sale of its German compact construction business and the January divestiture of its material handling and port solutions business.
In early May, it announced its Q1 2017 results, which included an operating loss of $6.3 million on $1 billion in revenue. In the same quarter, it had an operating profit of $11.3 million on $1.1 billion in revenue. That’s the bad news. The good news is that it’s reduced its net debt and delivered a 10% year-over-year increase in its backlog, the first such increase in the last eight quarters. In addition, Terex repurchased 6.5 million shares during the year. According to CEO John Garrison:
“We significantly improved our capital structure, reducing our debt by approximately $600 million, improving interest rates, and extending our maturities. We expect interest savings of about $35 million on an annualized basis … We are increasing our full year adjusted EPS guidance to $0.80 to $0.95.”
While it’s a work in progress, I do believe the upside is much greater than the downside.
Money-Losing Stocks to Buy: Ctrip.com International (CTRP)
Sector: Services
On a GAAP basis, Ctrip.com International Ltd (ADR) (NASDAQ:CTRP), China’s largest online travel agency, is finally making money after significant investments in its business over the past couple of years resulted in a small loss in 2014 and a much bigger one in 2016.
In Q1 2017, however, Ctrip delivered an operating profit of $60.2 million on $891 million in revenue with all five of its operating segments achieving year-over-year growth. Its overall revenue grew 46% in the quarter, well ahead of management’s expectations.
Operating margins are getting much stronger — 15.4% in the latest quarter, more than double what they were a year ago — suggesting future profits should continue to move higher as it gains market share in the online travel market in China.
It’s going to take a few quarters for Ctrip to prove it can sustain profitability. When it does, CTRP stock is going to rocket higher despite its nosebleed valuation.
Money-Losing Stocks to Buy: Shopify (SHOP)
Sector: Technology
Living in Canada, I’m a little gun-shy about recommending any tech stocks that are headquartered north of the border. That’s because we’ve got a track record of tech flameouts: Nortel and BlackBerry Ltd (NASDAQ:BBRY) come to mind, and especially one that’s losing money, but a man’s gotta do what a man’s gotta do. I’m sure you’ve heard of Shopify Inc (US) (NYSE:SHOP), the e-commerce platform that gives small- and medium-sized businesses a fighting chance.
It’s in growth mode at the moment sacrificing profits for scale and while I generally like to own stocks whose companies are making money, I’m totally down with its strategy to go wide and deep and then worry about profits. Making a little from a lot of customers, it’s the only way to go. Jeff Bezos wrote the book on this type of growth and Shopify’s following it to a tee.
It’s so confident about its business model that it passed on borrowing money to grow the company and instead announced in mid-May that it was selling 5.5 million shares, about a 7% dilution to existing investors, that should raise almost $500 million. Although it’s not expected to make money until 2018, you’ve got to like its CEO’s calm assuredness about the future.
“We’ve hit our stride as a public company,” CEO and founder Tobias Lutke said during its May 2 earnings call. “We’re starting to be more comfortable leading this space rather than just being a market participant.”
If you’re techie you might want to brush up on your French and head to Ottawa to work for Shopify. The stock options, alone, will make it worth it.
Money-Losing Stocks to Buy: Twitter (TWTR)
Sector: Wildcard
In my most recent article about Twitter Inc (NYSE:TWTR), I suggested investors take a small position in TWTR stock because it looks as though it might have turned a corner toward making money not to mention CEO Jack Dorsey appeared very confident announcing better-than-expected first-quarter results in early May.
The fact is Twitter is going to get bought out. It’s not a matter of if, but when. Former Microsoft Corporation (NASDAQ:MSFT) CEO Steve Ballmer recently said as much while speaking at the Code Conference in California:
“There’s a real opportunity to make that a valuable economic asset. [It] gives people a chance to communicate directly with the people they want to talk to in the world … The business over time will either get sorted through or it will be an appropriately valuable asset for somebody to buy.”
At this point, it’s obvious Jack Dorey also knows this. It’s an $18 stock worth taking a small chance on despite not making any money.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
