Whenever a company endures a tough period, it provides long term investors with an opportunity to buy into a potential turnaround story. Clearly, this doesn’t always pay off and the company in question may continue to deliver disappointing profitability and share price falls. However, when a business is able to adopt a refreshed strategy and benefit from an improved operating environment, significant capital gains can result for those investors who took a risk and bought-in at a low ebb.
One such opportunity is Whitbread (LSE: WTB). The owner of Costa Coffee and Premier Inn has recorded a share price fall of 21% in the last year and while some of this is justified, its shares appear to have more than adequately priced-in the risks they face. Namely, concerns surrounding the impact of the new living wage as well as doubts about the prospect for consumer confidence as UK interest rates begin to rise.
However, with Whitbread trading on a price-to-earnings growth (PEG) ratio of just 1.5, it seems to offer a sufficiently wide margin of safety to warrant investment. And with demand for good value hotel rooms likely to remain buoyant and its Costa Coffee chain being the dominant player in a hugely popular space, Whitbread’s long-term future remains sound.
Risky-yet-enticing
Also offering substantial turnaround potential is Lonmin (LSE: LMI). Unlike Whitbread, the risks present in its industry have come home to roost and the mining company has been lossmaking in each of the last two years.
Clearly, this is largely linked to the decline in commodity prices and while this risk remains, an improved profit outlook as well as a low valuation indicate that Lonmin could continue the turnaround story that’s set to see its bottom line move from red to black next year.
For example, Lonmin’s share price has fallen by 99.9% in the last five years and while its asset base may not be as strong as it once was, this indicates that there’s tremendous scope for capital gains if investor sentiment improves. With a refreshed strategy, a recent fundraising and a brighter outlook for commodity prices, Lonmin is a risky-yet-enticing recovery play.
Look elsewhere?
Meanwhile, Gulf Keystone Petroleum (LSE: GKP) has also suffered from the impact of falling commodity prices, with its shares being down by 88.2% in the last year. However, while a number of its sector peers have staged a recovery in recent months as the price of oil has soared from $28 per barrel to around $50, Gulf Keystone Petroleum has been left behind. In fact, in the last three months its shares have fallen by 67% while the price of oil has risen by almost 30%.
Clearly, Gulf Keystone Petroleum’s internal challenges are more than offsetting a brighter external outlook. And with payment problems likely to remain as well as the geopolitical outlook for the Northern Iraq region being highly uncertain, it may be prudent to look elsewhere for turnaround potential.
