`Junk' stocks can be salvaged
One day, George Putnam III may be to junk stocks what Michael Milken was to junk bonds. A few years back, as a lawyer, Mr. Putnam helped bring the Reading Railroad out of bankruptcy. And he noticed that a group of investors was getting rich on the company's revival. A million shares bought for less than $50,000 back in 1975 was worth $18 million as the Reading emerged out of Chapter 11.
``I started investing on my own in the bankrupt and near-bankrupt,'' he says.
Last year, Putnam started New Generation Investments in Philadelphia. This two-man research boutique produces The Turnaround Letter, covering the dregs and near-dregs of the business world.
So far, the results are impressive. Since July, Putnam has persuaded 3,000 subscribers to sign on. Moreover, his stock picks are up about 30 percent. Over the same period, the Dow industrials are up about 20 percent.
While he expected that bankrupt stocks would provide the best returns, so far only two of his 19 picks have actually filed for Chapter 11. One fell 27 percent before Putnam sold out. But the other is up 41 percent.
``Most of the 30 or so big bankruptcies have been overpriced,'' he says. ``The key is to see how much of the equity the shareholders are going to get.''
For example, only 15 percent of the stock in Storage Technology will go to shareholders. The rest goes to creditors.
``The best buying opportunities,'' he says, ``won't come until after the company emerges from Chapter 11, because then creditors tend to sell, which depresses prices.''
His best recommendation to date, up 100 percent since November, was Offshore Logistics, a company that services oil rigs in the Gulf of Mexico. It nearly succumbed to falling oil prices but managed to escape bankruptcy by selling assets.
Besides his experiences as a lawyer, Putnam is on the board of several funds in the Putnam Group, one of the largest and oldest mutual fund groups - which his grandfather founded.