The Upside of Economic Downturns
bySep 22nd 2011 11:00AM
We could ruminate all day about the negatives of economic downturns. But that wouldn't make us any money. Instead, let's focus on the ways that hard times actually help the economy.
If you're an investor willing to look through the short-term uncertainties, now is the time you'll find opportunities that simply weren't around during the boom times.
The Tale of a Cheap Makeover
Back in 2008, Steak n Shake, a well-known Midwestern burger and shake brand, was on the verge of going out of business. Reckless expansion produced a horrific balance sheet and a burn rate of $100,000 per day!
Ultimately, an activist investor named Sardar Biglari took over and righted the ship. Despite taking over during the Great Recession, he performed a remarkable turnaround that benefited the company, its employees, and certainly its shareholders. While you may have missed the Steak n Shake turnaround, it's not too late to benefit from Biglari's magic touch: His sights are now focused on Cracker Barrel (CBRL). His holding company, Biglari Holdings (BH), owns 9.3% of the shares and is fighting for a board seat.
If Biglari wins, you can bet there will be big changes, including slashing of management perks and compensation. (Current CEO Michael Woodhouse won't go down without a fight. Would you if you earned total compensation of more than $30 million from 2007 through 2010?) It's realignments like this that can put money in shareholders' pockets.
Big Changes in Banking
Another opportunity for opportunistic investors is in banking.
As of Sept. 9, 71 banks had failed so far this year. Those closings are painful but essential to the healing process.
The closings involve the transfer of assets from troubled and poorly-run institutions to stronger and better-run entities. While many banks are facing a case of merger indigestion, the best are making solid progress toward a very profitable future. For investors, this should result in rising dividends (nice inflation hedge), as well as increased multiples on their earnings.
Two that seem attractive are Wells Fargo (WFC) and Bank of America (BAC). While both have considerable exposure to mortgage fallout, each offers a compelling case for investors. Wells Fargo is a better-run organization with a history of excellent customer services and retail expertise. Bank of America has more compelling challenges and is priced accordingly. But B of A recently received a jolt of confidence in the form of a $5 billion loan from Warren Buffett. The best part of the deal is that it includes warrants to purchase 700 million shares of B of A stock at $7.14.
If those investments seem too risky, why not load up on Berkshire Hathaway (BRK-B)? This venerable institution is cheaper than it's been in years, priced at just over book value and growing at 8% to 10% per year. As they say, you're getting the best investor the world has ever known, for free. Now that's a deal! See? Times aren't so bad after all.
Motley Fool contributor Buck Hartzell owns shares of Berkshire Hathaway and Biglari Holdings, and warrants in Wells Fargo. The Motley Fool owns shares of Biglari Holdings, Bank of America, Wells Fargo, and Berkshire Hathaway, and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway.