This Beaten-Down Stock Is Up 35% This Year: Should You Buy?

After the recent spurt, is Yellow Pages (TSX:Y) worth a closer look for a contrarian bet?

| More on:

Any major uptick in a stock deserves a closer look, especially if that stock has been consistently declining for several years and is now up by more than a third, as such a move could indicate a turnaround. That’s exactly what happened to former marketing giant Yellow Pages (TSX:Y).

Now, most millennials would have absolutely no idea what the Yellow Pages were, and most older investors would be surprised to learn that the company is still around, much less publicly traded. But the company’s management has been desperately trying to turn the ship around and evolve the business model for the digital era. 

Over the past five years, the company has shed a number of its core assets, unlocking millions in cash and acquiring digital marketing talent to focus on offering services to a niche audience. 

According to the company’s website, YP services now include digital marketing, content syndication, social media management, and website fulfillment for small and medium-sized enterprises (SMEs) across Canada. In other words, the Yellow Pages is now a digital marketing agency. It’s a heroic attempt at salvaging a sinking ship by adopting new technology.  

To achieve this pivot, the company had to cut back on spending and debt on a colossal scale. Operational expenses were cut by 35% over the past year alone, and after completing principal repayments of $144.7 million on Senior Secured Notes, management cut the debt burden by half. Net debt is now roughly equal to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). 

These adjustments convinced National Bank to raise its rating on YP’s stock from “sector perform” to “outperform” in February of this year. The shift in fundamentals and market sentiment helped YP meet the price target ($8.5) earlier this month. So far this year, the stock is up by 34%. 

Contrarian investors who bought at the start of 2019 are probably pretty satisfied with their investment, but that doesn’t change the fact that long-term investors have seen their wealth absolutely decimated and potential new investors face a bleak future. 

The recent spurt doesn’t cover the 70% loss that investors have endured over the past five years. The company’s management failed to realize the paradigm shift in the marketing industry and was slow to adapt its business model. Legacy assets dragged the company down, while search engines, e-commerce sites, mobile apps, and social media platforms transformed the landscape. 

Now, YP’s new business model faces intense competition from both technology giants and start-up digital marketing agencies with younger, more experienced talent. It doesn’t help that the Yellow Pages brand has itself has become a liability. 

Bottom line

A lucky handful of investors recognized the fact that YP’s stock was probably oversold and benefited from the recent bounce. However, the company’s prospects are as bleak as ever, and investors shouldn’t hold their breath for similar capital appreciation in the future.  

If you hold the stock, it might be time to cash out. If you’re looking for a contrarian bet on a beaten-down asset poised for a turnaround, you should probably look elsewhere. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Investing

dividends grow over time
Investing

Opinion: Your 2025 Investing Plan Should Include These Growth Stocks

Here are three top Canadian growth stocks long-term investors may want to consider right now.

Read more »

ETF chart stocks
Investing

These Are My 2 Favourite ETFs to Buy for 2025

iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW) and Vanguard All-Equity ETF Portfolio (TSX:VEQT) are strong options.

Read more »

calculate and analyze stock
Dividend Stocks

TFSA Investors: 3 Dividend Stocks to Consider Buying While They Are Down

These stocks offer attractive dividends right now.

Read more »

data analyze research
Dividend Stocks

Top Canadian Stocks to Buy Right Away With $2,000

These two Canadian stocks are the perfect pairing if you have $2,000 and you just want some easy, safe, awesome…

Read more »

money goes up and down in balance
Dividend Stocks

Take Full Advantage of Your TFSA With These 5 Dividend Stars

Choosing the right dividend stars for your TFSA can be tricky, especially if your goal is to maximize the balance…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Best Canadian Dividend Stocks to Buy and Hold Forever in a TFSA

These three top dividend stocks are ideal for your TFSA due to their consistent dividend payouts and healthy yields.

Read more »

open vault at bank
Dividend Stocks

1 Magnificent TSX Dividend Stock, Down 10%, to Buy and Hold for a Lifetime

A recent dip makes this Big Bank stock an attractive buying opportunity.

Read more »

Canadian Dollars bills
Dividend Stocks

2 Incredibly Cheap Canadian Growth Stocks to Buy Before It’s Too Late

Buying cheap stocks needs patience and a long-term investment approach. Only then can they give you extraordinary returns.

Read more »