Value in 60 Seconds: Is the turnaround already priced in?

13 Jun 2023 · 1 min

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David Trainer uses reverse DCFs to test whether turnaround scenarios for troubled companies are already priced in. Even optimistic revenue and margin assumptions often show the stock is still expensive, suggesting the market has already bet on the recovery.

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This is one of the things I love about the reverse DCF, and I get this all the time with institutional investors around turnarounds. When we say a stock is looking very dangerous, it looks bad. Well, have you considered the fact that this business is about to be turned around? Okay, let's test that. Let's test that theory, and I'll go into the DCF and I'll say, all right, turnaround. What's your best case scenario for how this business turns around? What do you think? 5, 10, 20% revenue growth? Well, I think it'd probably get back to, you know, high single digits. Okay, well let's just put in 10. All right. And what's the best case margin here? He goes, well, I have this, this, or that. And we put that in there and it still looks really expensive, right? It still takes like 100 years. The turnaround is priced in, my friend. You gotta understand what's already baked in.