Regularly, I search for investment opportunities in three main pools:

1. Value stocks – Usually, companies whose stock price is distressed by an economic downturn;
2. Growth promises – Companies with a solid growth outlook, capable of growing many times from the current level;
3. Fallen Angels – Great companies going through an earnings glitch, but owning a great structure capable of a comeback. You can also call this turnaround investing.

I have found investment opportunities in all the mentioned pools. All of them have advantages and disadvantages, however, the Fallen Angels class is the most emotional of them and tends to carry much more emotional risk. One of the main problems relates to what investors commonly call catching a falling knife. The momentum of company in trouble sometimes is enough to declare a death sentence of an otherwise viable organization.

Investors should never underestimate the effect that a negative sentiment in the financial community can have on a company.

However, investing in companies capable of executing a turnaround can be immensely rewarding. Sometimes, this is an once in a lifetime chance to enter in a great company at really discount prices. Whenever I believe I have found a Fallen Angel, I am instantly on fire. I start researching every bit of information that may be relevant to support or dismiss my rationale.

This brings us to another risk related with this kind of investment. Investors might end up on one of the two ends of the spectrum: We might become company fans; or we might lose faith in the company before giving it enough time.

The Coach Case

Until a couple of weeks ago, I was dealing with this kind of dilemma. I have been long Coach (COH) for some time now. Naturally, a couple of months ago, I started wondering if I had become a Coach’s fan. I feared that I could be sympathizing too much with the company. On the other hand, I also thought that I could be losing my faith too soon to reap the rewards that follow successful turnarounds.

Fortunately, a couple of weeks ago I spotted what seemed to be an inversion in Coach’s revenues trend. This was enough to keep me on track with the company. Now, Coach’s Q3 results presentation supports this view, estimating positive sales comps in Q4 ending a long streak of negative comps.

Why Coach has good chances of becoming a successful turnaround investment

The brand was the first thing that made the company interesting for me. A strong brand alone is capable of moving mountains. In a turnaround it's clearly preferable to have a strong brand on your side.

Additionally, it was essential that the management team was able to present a business model that corrected previous imbalances. The management team decided to re-elevate the brand, going beyond accessories by introducing a full clothing line and to revamp its own retail stores.

The strategy seemed right and the company seemed to have the right skills for the purpose. Now, the results are starting to support the idea that Coach is leaving the woods and entering a new era.