When the bond market and equity markets disagree, the bond market (smart money) is almost always proven right.

music selection:  “Wherever You Will Go” — The Calling

Newell Brands (NWL) stock has fallen on hard times. Shares are down over 64% from their post-merger peak. All of the company’s bonds have continued to trade right around par though. I love to see this setup. It is often a clear indicator that the equity markets are overreacting and there is a triple-digit gain opportunity available in the next 18 to 24 months.  I think NWL is a strong buy up to 20 a share.  Here’s why.

The company controls dozens of strong brands. The market has gotten spooked by a merger that has gone poorly and resulted in the assumption of a lot of debt. Three activist investor firms have bought substantial stakes in the company and are forcing a turnaround strategy. The group is led by the notorious Carl Ichan and between the three firms control 9 out of 12 board seats. The activists are clearly in charge of the company at this point.

Historically, Newell has grown by acquisition. Its most recent acquisition more than doubled the size of the company. It is worth noting the acquired company (Jarden) also historically grew by acquisition. This has led to a situation where there are dozens of competing management teams and dozens of computer and accounting systems for the company at whole. The effect has been that it has been challenging to develop synergies due to complexity.

The activist investors are forcing management’s hand, however. They are requiring the divestment of underperforming brands. The company has already raised over 5 billion from sales of the underperformers. At the same time, the complexity of the company is decreasing. Management expects cost savings in excess of 1.3 billion by 2021 as a result.

More sales are planned which will leave the company with only its strongest performing brands with highest margins and its rapidly growing e-commerce segment. Debt has already been cut by 34% and management intends to reduce debt further as well as buy back its own shares with additional business unit sales proceeds.

Ordinarily, I’d be wary of the company’s BBB- credit rating (one notch above “junk”.)  But this is a company that is deleveraging and thus is in no danger of a downgrade. At the same time, the company expects to finish its turnaround plan at an EV/EBITDA ratio right around 9. At the peak, the company sold for 22 times that ratio. Just maintaining its current ratio of 13 would yield significant upside for the shares. Assuming a return to the 22 ratio that was achieved when the market was initially cheering the Jarden acquisition, shares would have to rise over three times to about 75 a share.

I fully expect Ichan to make out like a bandit on this deal. The good news is it is easy to follow along and ride his coat tails. Investors buying under 20 today have a high probability of earning triple-digit gains in under two years. Don’t miss this opportunity.