The broader markets have turned a bit shaky over the last few trading sessions. While tech stocks, which led the first-half rally from the front, have pared gains, small-caps have taken over the baton. The Dow Jones Industrial Average ($DOWI), which underperformed the S&P 500 Index ($SPX) and Nasdaq Composite ($NASX) badly in the first half of the year, has also looked strong lately, and scaled new highs.
Amid the shaky broader markets, I find Disney (DIS) and Intel (INTC) to be two turnaround stocks that can pay off well for patient investors.
What Are Turnaround Stocks?
Turnaround stocks are companies that - as the name suggests - are trying to restructure, or “turn around” their business, usually after a lengthy period of underperformance. To be sure, I find the “turnaround” concept to be one that's often abused on Wall Street, with companies selling their dodgy turnaround strategies to investors under different flamboyant names.
Turnarounds are neither easy, nor are they a certainty - as evidenced by the performance of Peloton Interactive (PTON), whose stock has fallen to new lows over two years of restructuring. Typically, turnarounds take considerable time, often spanning a few years, but if the strategy works well it can lead to superior returns for investors.
In the meantime, there are bound to be phases where investors might lose faith in the story.
Intel Looks Like a Turnaround Stock Worth Buying
In 2021, Intel brought back Pat Gelsinger as its CEO after years of sagging growth and dismal stock market returns. In March of that year, Gelsinger announced the IDM 2.0 transformation strategy, whose key pillar was the pivot to the foundry business, where Intel would also make chips for other companies.
While the market’s initial reaction to Gelsinger’s return and the IDM 2.0 strategy was positive, the stock subsequently pared gains. However, INTC has recently seen some positive momentum after briefly falling below $30 in May, and has recouped some of its recent losses.
Intel’s foundry business lost a massive $7 billion last year, which is no small sum by any standards. Gelsinger believes the losses in the foundry business will peak in 2024, and expects the segment to break even at the operating profit level “midway between now and the end of 2030” - which is roughly 2027.
The company aims to become the second-largest foundry globally by 2030, and expects the business to post operating margins of 30%. While those targets might sound ambitious, Intel is capitalizing on the onshoring of chip manufacturing - including in the U.S., where it is among the biggest beneficiaries of the CHIPS Act.
Notably, while chip stocks - including the formidable Nvidia (NVDA) - plunged on Wednesday following Donald Trump’s comments on Taiwan, Intel closed in the green, which highlights how markets see it as an onshoring play.
INTC Stock Forecast Looks Positive
The worst could be over for Intel, and the company expects its revenues to rise sequentially in the coming quarters this year, as well as in 2025. I believe that the onshoring of chip manufacturing will only gain traction in the coming years as countries look to take more control over this crucial part of the supply chain, which is a critical component for industries ranging from automotive, gadget manufacturing, as well as artificial intelligence (AI).
While Wall Street analysts have rated INTC as a “Hold,” its mean target price of $39.49 is 10.2% higher than current price levels. I believe Intel's turnaround will take at least take a few more quarters, but the stock should eventually reward patient investors as the company strives for a big chunk of the onshore foundry business.
Disney’s Turnaround is Also a Work in Progress
There is more than one similarity between Disney's and Intel’s turnaround stories. Both of these companies were once seen as formidable names in their respective industries, but lost out to competitors after failing to read the undercurrents in the industry in time. While Intel could not capitalize on the smartphone boom, Disney was a little late to pivot to streaming. Shares of both have gone practically nowhere over the last 10 years, and Disney - like Intel and Gelsinger - brought back old hand Bob Iger to lead the company in 2022.
As part of Disney’s transformation, Iger restructured the management teams and brought back creativity and storytelling – which have been its strengths historically – as the center point of discourse.
Disney has laid off thousands of workers and is targeting structural cost savings of $7.5 billion. Its streaming losses have all but evaporated from their nearly $1.5 billion peak in the last quarter before Iger's return.
The company is making fewer but better movies, and those results are now visible. Its “Inside Out 2” is not only the most successful movie at the box office this year, it's also the fourth most successful animated movie ever.
Disney stock soared after Iger’s 2022 return, but then pared gains on fears that the transformation wouldn't be as easy as it might sound. However, I believe the company is on the right track with its multiple initiatives, and like Intel, DIS stock could reward patient investors given its reasonable valuations and attractive risk-reward.
On the date of publication, Mohit Oberoi had a position in: INTC , NVDA , DIS , PTON . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
