No stock has been hot forever. Not even the FANG stocks.
Every member of FANG has had its rough days.
Facebook Inc (NASDAQ:FB) struggled mightily after its IPO in 2012, and took several quarters just to get back to even with its IPO price. But then FB stock turned things around, and hasn’t really looked back since.
Amazon.com, Inc. (NASDAQ:AMZN) soared to nearly $100 in 1999 on internet euphoria. Then it dropped to basically $5 by 2001 as that euphoria died. Now, the e-commerce giant has a share price of $1,500.
Netflix, Inc. (NASDAQ:NFLX) dropped big after the company split apart its DVD and streaming businesses in 2011. Since then, streaming has become the staple of media entertainment consumption, and NFLX stock has soared.
Alphabet Inc (NASDAQ:GOOG) stock didn’t make much progress from 2009 to 2011. Then it took off like a rocket ship once the digital ad landscape went global.
In other words, even today’s biggest winners went through dark days. Thus, tomorrow’s biggest winners may be in the basket of stocks that have been through the dark days and are now just starting to climb out.
With that in mind, here’s a list of 3 turnaround stocks that are hot right now:
Turnaround Stocks 1: Twitter Inc (TWTR)
I’m not the biggest fan of Twitter Inc (NYSE:TWTR) based on current valuation, but there is no doubt that this stock has broken its two-year slump and skyrocketed to levels not seen in several years.
For most of 2016 and 2017, TWTR stock was range bound in the mid-teens level. Advertising revenue growth was coming off the rails, and actually dipped into negative territory for several consecutive quarters in 2017. Profitability concerns grew, and the question turned from “How profitable can Twitter be?” to “Will Twitter ever be profitable?”
But then everything changed in the fourth quarter of 2017. Advertising revenue growth, which had fallen into negative territory for the prior three quarters, jumped back into positive territory. The company started to figure out how to monetize its data through a data licensing businesses, which sells user data to third-party buyers. That added more firepower to revenue growth.
Plus, it’s a particularly high-margin business, so data licensing ramp led to margin expansion. Profit margins started to creep into positive territory.
All this continued in the company’s first quarter earnings report. Ad revenue growth accelerated. Data licensing revenue growth accelerated. Margins expanded. Profitability improved.
TWTR stock dropped on the news because management sounded a cautious tone on growth going forward given a competitive landscape. Plus, regulation hangs over the stock, particularly the company’s data licensing business.
For those reasons, TWTR stock looks risky here.
But there is no doubt that TWTR stock is one of the hottest turnaround stories on Wall Street right now.
Turnaround Stocks 2: Fossil Group Inc (FOSL)
The death of the traditional watch category at the hands of smartwatches led to an epic demise in shares of traditional watch king Fossil Group Inc (NASDAQ:FOSL).
FOSL stock tumbled from $130 to below $10 in just a few years.
But the turnaround in FOSL stock got started last quarter when the company reported much better than expected holiday numbers. The reason for the beat? Acceleration in the company’s smartwatch business.
As it turns out, not everyone who wants a smartwatch is buying an Apple Watch. A lot of traditional watch enthusiasts and potential smartwatch buyers are intrigued by the idea of a smartwatch, but don’t want to compromise on style. They want a fashionable watch which doesn’t look like a geek toy, but also has the functionality of a geek toy.
Fossil is succeeding in this era of the market called the hybrid smartwatch. It is the overlap of traditional watch style and smartwatch functionality where fashion and technology converge to create a smartwatch that looks good.
Fossil is in the early stages of its turnaround. The hybrid smartwatch market is still in the early adopter phase, but once mainstream adoption hits, Fossil could once again become watch royalty.
Meanwhile, FOSL stock is dirt cheap. This company used to earn around $7 in earnings per share. The stock trades at $14. Granted, a huge chunk of sales are gone since the heyday and margins have been decimated. But if the hybrid smartwatch business ramps as expected, then $2 to $3 in earnings per share power isn’t out of the question.
A market-average 16-times multiple on that gets you to a $40 stock. Again, FOSL stock currently trades at just $14.
Turnaround Stocks 3: Axon Enterprise Inc (AAXN)
In April 2017, the company formerly known as Taser International re-branded as Axon Enterprise Inc (NASDAQ:AAXN).
As part of the re-branding, the company essentially changed the focus of its whole business model from selling tasers to selling body cameras and the accompanying data management and cloud storage solution. To accelerate this transition, Axon agreed to give away free body cameras to every police officer in the United States for a year.
Wall Street hated the idea. AAXN, after all, is a business, not a charity. The stock dropped to $21, and it stayed there for a few months as the numbers over the next several quarters showed significant margin pressure.
But time and time again, I said to buy AAXN stock while its margins and valuation were depressed (read here, here, and here). The whole idea was that everyone would love the one-year free trial, and subsequently, AAXN would sell a whole bunch of body cameras, smart weapons, and cloud subscriptions the following year.
Indeed, that has happened. AAXN just reported robust fourth quarter numbers alongside a strong guide that called for continued strong revenue growth and big margin expansion. AAXN stock jumped to above $40 on the news.
Moreover, since that report, it seems like everyone and their best friend is ordering smart weapons and body cameras. In the month of April alone, the Chicago Police Department ordered nearly 3,500 smart weapons, the Montgomery County Police Department rolled out in-car cameras to 900 vehicles, and the Kent and Essex Police forces in the UK ordered almost 5,000 Axon cameras.
Clearly, this is one of the hottest turnaround stories on Wall Street. AAXN was a $20 stock not too long ago. Now, it’s at $42, and the momentum is only building.
As of this writing, Luke Lango was long FB, AMZN, GOOG, FOSL, and AAXN.