"Bankruptcy is the 'kiss of death,' and companies that have filed for bankruptcy should be avoided at all costs."
That's just common sense and solid investing advice... right? Right? Well, like most blanket statements, it's completely wrong.
It's wrong, and I'm going to prove it to you in the best possible way: with the ticker of a $7 "special situation" stock I think is primed and ready for big profits.
It's not even an exception, really. There is in fact a substantial body of evidence showing that companies exiting bankruptcy can provide market-beating returns.
It's a corner of the market I regularly check, looking for opportunities, and I'm going to share one right now...
There Are Different "Flavors" of Bankruptcy
It flies in the face of conventional "wisdom," but certain bankruptcy situation can yield enormous profit potential.
See, most of the time, when a company files for bankruptcy, it's because it can't pay its bills or make its debt payments. So when Garrett Motion Inc. (NASDAQ: GTX) filed for bankruptcy in 2020, most investors figured that was the case and ignored the stock.
After all, Garrett Motion makes turbochargers, and everybody and their sister knows the internal combustion engine (ICE) is dead and electric vehicles (EVs) are the next big thing... right? That a company like that should be running into "financial difficulty" - well, it just makes sense... right?
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Of course, perception is not always reality.
The truth is, Garrett Motion had zero cash flow issues. All bills and debts had been paid - in full and on time.
Rather, Garrett Motion filed for bankruptcy because of a purely technical issue. There was a dispute with its former parent company, Honeywell International Inc. (NASDAQ: HON) about who was responsible for liabilities related to asbestos brake pads manufactured before 1986. Honeywell wasn't negotiating, so Garrett Motion filed for bankruptcy and forced them to work out a settlement.
The settlement was eventually worked out to the satisfaction of both parties, and Garrett emerged from bankruptcy in due course.
Still, most investors avoid the stock because of the taint of bankruptcy, and their own firm belief in the electric vehicle misconception that exists among investors right now.
That's just more upside for us...
There Are Still Bargains in the ICE Vehicle Segment
Don't get me wrong. The EV market will grow quickly, and it will eventually be the dominant vehicle type sold worldwide. It's inevitable that will happen... but it won't happen as quickly as the politicians and stock analysts are telling you.
What's more, business at Garret Motion is actually fantastic right now; turbocharger sales are brisk as can be. There are still billions of internal combustion engines on the world's roads right now, and they still constitute the overwhelming bulk of the car and small truck market.
As the economy roars back, Garrett is also seeing demand for large diesel vehicle turbochargers. Of course, Garrett can see as well as anyone else which way the wind is ultimately blowing, so it's developed the first electric motor turbocharger - and received several awards for it, to boot. It also makes the electric compressors used in hybrid cars.
Garrett's Long-Term Outlook Looks Great
There will be strong demand for Garrett's turbochargers for years, if not decades to come. As a result, the company will generate enormous amounts of cash over that time.
One of the more interesting aspects of the turbocharger business is they are designed "into" the cars long before production begins. So, if the original specs call for a Garrett Motion turbocharger, the car will be built with a Garrett Motion turbocharger. The odds that a manufacturer would ever up and switch over to, say, BorgWarner Inc. (NYSE: BWA) - Garrett Motion's only real competitor - are slim.
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That makes this a very predictable business - something I love to see in a stock. For example, 88% of expected 2023 production is already booked.
Garrett Motion will use some of that cash to continue to develop products for the electric and hybrid vehicle markets. For example, 40% of the money Garrett Motion spent on research and development (R&D) last year was developing new technologies.
Management is also starting to move into another area that could become a huge business. The "connected car" with full wireless access is becoming standard, even at the low end of the auto market.
While connected cars can be more convenient and more efficient, they're also highly vulnerable to hackers - a worrisome idea when you're blasting down a highway at 80 miles per hour. Garrett Motion is currently developing cybersecurity systems for connected vehicles.
Garrett Motion has developed an onboard hardware solution that blocks unauthorized messages from outside the car. The programs can also read and detect anomalies on the vehicle network with high accuracy.
It also offers tools for vehicle fleet security operation centers. Its programs use machine learning and advanced analytics to aggregate, correlate and prioritize events from millions of vehicles. This allows human operators to focus on important cases and understand the nature of a cybersecurity issue.
Garrett Motion also offers software programs that can diagnose vehicle health and help fleet operators, auto manufacturers, and parts suppliers evaluate and manage any problems with a car. This should help increase customer satisfaction as a timely diagnosis can help prevent downtime and costly repairs.
This Stock Is a Steal at Less Than $7
Garrett Motion is in fantastic financial shape - and the groundwork is there for it to stay that way. The issues with Honeywell are resolved. In addition, they announced a $100 million buyback plan for both the common and preferred stock in November.
It is a market leader in the turbocharger marketplace, very well prepared for the EV future. This company will do a lot better than just roll with the punches the industry transitions over the next couple of decades.
Wall Street is completely ignoring the stock. I know of only one analyst following the company - and, believe me, that analyst does not host a show on CNBC or FOX Business. Those folks won't be telling their viewers about Garrett Motion anytime soon.
The stock is trading at less than five times earnings, compared to the S&P 500 that's trading at more than 36 times earnings. The market cap is pretty much equal to the amount of earnings before interest. taxes, depreciation, and amortization (EBITDA) it will produce this year.
The bottom line: Open a position today, as soon as you can. I expect GTX shares to triple or better over the next several years as they continue to use cash flows to develop new lines of business, reduce liabilities and buy back stock.
There are lots of stocks out there capable of producing serious return potential. Right now, I know of three massive events coming together to deliver an opportunity of truly historic proportions. I'm talking $5 trillion in new wealth - and three stocks that could go ballistic, maybe as much as 300% to 500% over the next six months. You can get the details, and tickers for those three stocks, right here.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.