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My top 2 turnaround picks for 2017

Image: Ted Baker. Fair use

Most domestic-oriented stocks have recovered from the drubbing they received in the weeks immediately following the Brexit vote as the market’s worst fears about an economic collapse proved incorrect. However, this recovery hasn’t extended to domestic retail banks, whose shares remain well below their pre-Brexit vote levels. This is certainly the case for challenger bank Virgin Money (LSE: VM), where share prices are down nearly 20% in 2016 despite steadily growing revenue, profits and dividends.

But after this dramatic pullback I believe Virgin Money is priced far too low for the inherent growth potential the healthy bank offers. A steadily growing loan book combined with a proven ability to cut costs at a faster clip than giant rivals such as Lloyds or RBS leads me to believe 2017 will be a great year for Virgin Money as investors realise that the domestic economy isn’t about to collapse.

Of course, Brexit did harm Virgin Money by forcing the Bank of England to cut reserve interest rates to 0.25%. However, through a strong focus on cost-cutting and cheap term lending facilities from the BoE, Virgin has maintained double-digit return on equity targets for 2017, despite the hit to net interest margin.

And while net interest margin has fallen slightly to 1.6%, Virgin’s top-line growth is more than compensating for this BoE-driven setback. As of the end of September, gross mortgage lending was up 14% and credit card balances up a full 41% since the end of December 2015. This growth isn’t even close to being done as the company still only controls 3.6% of the mortgage market and is targeting a further 36% rise in credit card balances by the end of 2017.

After pulling back in 2016, shares are currently priced at exactly book value, which shows investors are pricing-in none of this growth potential. Virgin Money is still tied to the health of the domestic economy. But with all signs pointing towards steady if not spectacular GDP growth in the year to come, I reckon Virgin shares could reverse 2016 losses.

The fabulous Baker boy

Another stellar company whose shares have fallen close to 20% in 2016 due to bearish predictions for the UK economy is clothing retailer Ted Baker (LSE: TED). Consumers are undoubtedly shifting away from shopping at traditional high street locations, but Ted Baker is still growing physical retail sales faster than it’s adding square footage. Furthermore, online sales are still providing spectacular growth, up 29.7% year-on-year in the latest interim results alone.

Combined with a growing international presence and great growth from the high margin wholesale segment, Ted Baker still offers significant upside for growth-hungry investors. Indeed, despite dropping 19% this year, shares are still pricey at 24 times forward earnings. However, this is the cheapest they’ve been since 2013 and with revenue and profits still growing by double-digits, I reckon now could be a great point for contrarian investors to take a closer look. Fashion is a tricky industry, but Ted Baker’s founder-led management team has successfully grown sales 19 years in a row and I don’t see this stellar record stopping any time soon.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Ted Baker plc. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.