It takes nerves of steel, an iron stomach and a ton of patience to invest in turnaround stocks, a dicey corner of the market populated by firms that have a viable strategy to improve their business.
Most investors shun these stocks, so you're moving against the crowd. And these corporate makeovers can take years; in the meantime, the shares languish. So why bother? Because if the company succeeds in its turnaround, the payoff can be big.
In the late 1990s, for instance, Apple (AAPL) teetered toward bankruptcy. But founder Steve Jobs, who had left Apple in 1985, came back as CEO. In short order, he partnered with Microsoft (MSFT), blasphemy to loyal Apple fans, launched the colorful iMac and iPod, and opened Apple's first retail store. Sales soared, as did earnings.
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Between Jobs' first day back in 1997 and the start of 2002, Apple investors had doubled their money, more than tripling the return of the S&P 500 Index.
Of course, many turnarounds fail, too. Here, we highlight the traits often shared by successful turnarounds and provide details about a few troubled companies worth considering today. We'll also discuss best practices if you plan on investing in one, and we'll point to companies early in the transition process that we're keeping an eye on.
Don't confuse a turnaround with an out-of-favor cyclical stock that just needs an economic recovery to rebound. A true turnaround is about change: "The key is that the company's future path is very different from what it is today," says Bill Nygren, manager of the Oakmark fund.
Successful turnarounds tend to share certain characteristics. A new chief executive is crucial. An activist investor pushing for change can be a defining trait, too. "You want to see a sense of urgency at the top to make changes," says John Linehan, manager of T. Rowe Price Equity Income fund.
Another helpful quality: customers who have confidence in the company's product or service, says Nygren. It can point to a viable business segment that can help the firm weather the transition.
Below, we highlight some turnaround stocks worth considering today. All data and returns are as of January 31.
Citigroup
When Jane Fraser took over as CEO of Citigroup (C, $81) in 2021, the bank's return on equity (a profitability measure) was 5%. That was far short of the 15% return on equity boasted by the best big banks.
And the stock was "very, very cheap," says Oakmark's Nygren. Citi's international banking footprint, once viewed as a plus, had become a drag on performance. And the bank had fallen behind U.S. peers on online banking and advisory services.
But Citigroup had a best-in-class business managing corporate investments in U.S. Treasury bonds. "Almost all of the Fortune 500 companies relied on it," says Nygren.
Although that part of Citi's business had been performing well, "other parts of the bank were floundering," he says. Fraser has leaned into that niche, and revenues in the Treasury services business segment have increased to $14.5 billion in 2024, up from $9.5 billion in 2020.
Meanwhile, Fraser reorganized the bank's business segments from three groups into five (services, market trading, investment banking, U.S. personal banking and wealth management). In 2024, all segments reported solid revenue increases compared with 2023 levels. And the bank's return on equity is now 7%. Says Nygren: "There’s still a lot of work to be done, but you're seeing progress."
At $81, the stock trades at less than 11 times expected earnings for the year ahead, while peer banks trade at an average price-earnings multiple of 15. Meanwhile, analysts expect year-over-year earnings increases of 21% in 2025 and 24% in 2026.
"If Citi achieves its turnaround goals, it's not crazy to think in three years you could double your money," says Nygren.
International Paper
International Paper (IP, $56) is in the early innings of its turnaround, as new chief executive Andrew Silvernail has been on the job for less than a year. But he is already shaking things up.
"There's clearly a sense of urgency," says T. Rowe Price's Linehan.
The company has been cutting costs, restructuring, and shifting its focus from print paper (a declining market) to corrugated cardboard packaging (a growing one).
It is shutting down facilities in six states and weighing options for its global cellulose fiber business – the absorbent stuff in, for example, diapers – including a possible spin-off.
Still, analysts are cool on the stock. Of the 11 analysts covering the company, two rate it Sell or Underperform, and four rate it Hold. Part of the problem is that shares have soared 62% over the past 12 months, thanks to two consecutive quarters of earnings that beat analysts’ expectations and rumors of a possible takeover.
At $56, International Paper shares are trading above their typical P/E multiple.
We'd wait for dips to buy, but Truist Securities analyst Michael Roxland says the stock's multiple is "warranted," given the firm's history of consistent cash generation, as well as its ongoing turnaround strategy. He rates the stock a Buy and sees it trading at $68 within the year, implying a 21% gain from recent levels.
Southwest Airlines
Southwest Airlines (LUV, $31) is embattled these days.
In 2024, activist investment firm Elliott Investment Management pushed for a new board chair and chief executive, saying in a letter to the board that the airline had failed to adapt "to changing times."
And in January, the Department of Transportation sued Southwest, alleging the airline had chronically delayed flights on two routes in 2022 for five straight months. The delays led to "unrealistic scheduling practices," which the government considers illegal in part because they mislead consumers. The airline has said that the claim is "not credible."
Southwest has assuaged Elliott, for now. Seven of 15 board directors retired in November. Six new independent directors will come aboard, many of them likely Elliott's picks. And the board also rejiggered its finance committee with oversight responsibilities. But current CEO Bob Jordan, a Southwest veteran who has been in charge since 2022, gets to stay.
Southwest undertook other initiatives, too. It will swap out its longstanding open-seating policy for assigned seats. Premium economy seating – more legroom and a larger seat, among other extras, for a higher price – is finally coming, too.
The trade-off: The airline's regular economy seats will lose one inch of leg room. None of these changes will manifest in flights until early 2026. But the airline hopes the moves will help business. "This is the most significant transformation in our history," chief executive Jordan said when the firm announced the initiatives.
Indeed. The airline's mostly domestic focus has hurt results in the post-pandemic era, as more U.S. travelers are traveling overseas. To cater to changing tastes, Southwest recently partnered with Icelandair to offer trips to Europe as soon as this year.
Bear in mind, this industrial stock could be turbulent for months to come. Shares rallied some in late 2024 but have slipped 6% since peaking in December.
And recently, a couple of analysts downgraded their ratings on the stock to Sell, including BofA Securities' Andrew Didora, who cited the airline's lower exposure to corporate, premium and international routes as a negative.
Shares trade at 19 times earnings, a tad below the stock's three-year historical median P/E of 20. And the stock yields 2.3%.
Walt Disney
Walt Disney (DIS, $113) has expanded its wheelhouse. The company known for its theme parks and its film and TV studios has a new-ish streaming service, which bundles Disney+, Hulu and ESPN+ and is a must-have for families with kids and sports fans. As of the second half of 2024, that business segment is now profitable.
Even so, the company faces some challenges. Advertising revenue and earnings at its TV networks (12% of overall sales) are declining, and theatergoing is still below pre-pandemic levels.
Disney execs hope the streaming service will pick up the slack and even drive company results in the future, but for now, the division's operating profits are a drop in the overall bigger bucket.
Meanwhile, Disney is spending big money to bolster the entertainment side of its business (parks, resorts, cruises), which has been hindered in part by wage inflation.
Bad publicity (Disney and Florida Governor Ron DeSantis settled their legal dispute over a special tax status in 2023) didn’t help.
Disney plans to spend $60 billion over the next decade to expand its parks and add four new cruise ships to its current roster of nine. A Frozen-themed area for Hong Kong Disneyland, for instance, is in the works, as is a Zootopia-themed area in Shanghai Disneyland.
Finally, the company's hunt continues for a new CEO to replace Bob Iger, who came back as CEO after the board fired his handpicked successor in 2022. The search kicked into a higher gear in January after board member and Wall Street veteran James Gorman stepped up as chairman and said finding a new CEO was a "critical priority."
Still, some analysts deemed the speed of the search – expected to end by early 2026, Gorman said – too slow.
At $113, Disney stock trades at 21 times expected earnings, in line with its five-year historical P/E, according to Zacks Investment Research.
BofA Securities analyst Jessica Reif Ehrlich says she believes Disney stock could outperform peers in 2025, given the streaming business' recent turn to profitability, and she cites Disney's beefed-up park and cruise business as catalysts for future growth. She rates the stock a Buy.
In the most recent quarter, Disney earnings beat expectations by 23%.
2 turnaround stocks worth monitoring
Some overhauls are not yet ready for prime time, but they still bear watching.
If recent reports of slipping sales growth are any clue, Starbucks (SBUX) needs to deal with increased competition.
A new CEO arrived in September 2024, but some of the new initiatives so far are underwhelming, including renovating stores and bringing back self-service milk bars.
In its favor: It’s Starbucks. In the most recent quarter, sales at existing stores declined (again), but earnings and revenues were better than expected, albeit down year-over-year.
It has been years since Gap (GAP) was a fashion trendsetter, but CEO Richard Dickson, who started in 2023, helped reinvigorate Barbie at Mattel (MAT), so he has experience with tired brands.
Dickson tapped fashion designer Zac Posen as creative director in early 2024, and he has already made waves. A Gap shirt dress he designed for actress Anne Hathaway to wear in May 2024 sold out in one day online.
Limit your turnaround bets
Before you bet on a turnaround story, consider waiting a year or two after a new CEO is named, says Bill Nygren, manager of Oakmark fund. The new leader needs time to assess the situation and put a management team in place. Only then can the execution of any strategy shift begin.
And if you buy, plan to hold the stock for at least three to five years. Otherwise, "don't bother," says Nygren. Turnarounds take time to yield results.
That said, the smallest bit of good news can send turnaround stocks soaring. Once you invest, as the firm notches wins along the way, you can take incremental profits, says Clif Droke, editor of the Cabot Turnaround Letter.
Keep an eye out for solid signs of progress in a turnaround, such as a healthier balance sheet and rising revenues and earnings.
Stable or increasing cash flow is another good sign, as is a spin-off, because it allows the more streamlined company to focus on its core competencies, says Droke. If those catalysts appear but don’t lift the stock, it might be time to move on.
Finally, limit turnaround bets to a small sliver of your overall portfolio. These are speculative investments.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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