There are lots of reasons to follow a business, even if you have no plans to invest in the company. Turnarounds often seem like a viable option for value investors because their valuations have fallen so far from where they once were (see this post about “discounting”). However, value investors who have this inclination should plaster this quote above their office desk.
“Both our operating and investment experience cause us to conclude that turnarounds seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”
Aeropostale offers a great example of this lesson in real time. After hitting a high of almost $32 in 2010, the stock has steadily declined to around 40 cents today. Below is the chart for the past two years. After falling almost 70% from $32 per share to $10 in 2014, the stock has went on to decline an additional 96%.
I am sure to get a few emails regarding X, Y, or Z company that had a miraculous turnaround and the stock went up 1000% fold. Sure, that happens. But it is rare, and akin to relying on your special teams to block a punt and return it for the game winning touchdown in the final seconds of the game (a la Michigan St. vs Michigan). I guess there is always a chance?