Should You Buy These 3 Turnaround Plays? Burberry Group plc, Glencore plc and McBride plc

Are shares in Burberry Group plc (LON:BRBY), Glencore plc (LON:GLEN) and McBride plc (LON:MCB) set to rebound?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying shares that have fallen over the past year is usually not considered to be a wise investment strategy. Shares that have performed badly in the past generally continue to under-perform the market for some time. This phenomenon is called the “momentum effect”, and it is well documented in financial markets worldwide.

McBride

Occasionally, though, some shares do make a spectacular recovery after a steep fall in their share price. To name one example, McBride (LSE: MCB), the manufacturer of private label household and personal care products, has seen the value of its shares more than double since the start of this year, after having lost 41% of its value over the previous two years.

The “reversal” in the trend of McBride’s share price is well justified too. Pricing in the market is stabilising and the green shoots of recovery are already evident in the company’s financial performance.

McBride’s latest financial results for the year ending 30 June 2015 showed adjusted pre-tax profits rise 46.6% to £28.5m. Most significantly, the improvement in earnings was primarily down to the improvement in operating margins. Adjusted operating margins rose 1 percentage point in 2015, to 4%, as management focussed on reducing manufacturing complexity and upgrading its production assets.

It is also important to understand that the transformation is only half finished, and there remain many opportunities for the company to become more efficient and grow into new markets. Management is confident that it can deliver continued margin improvement and has a set a medium term target for adjusted operating margins of 7.5% within the next three to five years.

If the company does indeed achieve that target, and if we assume that revenues grow by 2% annually, we could expect McBride to earn net profit of around £38m–£40m by 2018–2020. This would imply its shares trade at a multiple of 7.4–7.7 on its earnings after restructuring. So, although shares in McBride have already rebounded so strongly since the start of the year, they could still rise further.

Burberry

Like McBride, Burberry (LSE: BRBY) has seen structural and cyclical factors affect its recent financial performance. Growth is slowing as fashion tastes change, and sales of luxury goods have been hit by China’s anti-graft measures and slowing emerging market growth.

The company is also renewing its focus on productivity and efficiency. It has plans to take a firmer grip on cost management, too, by tackling hiring, rent, travel and other discretionary costs. In addition, it has begun to unify its three labels — Prorsum, London and Brit — under a single Burberry label, to provide a more consistent experience for customers and reduce internal complexity.

These measures will not solve all the problems it is facing, but they will at least alleviate some of the pressures on its bottom line. City analysts  seem to be too pessimistic on their outlook for the group’s earnings. They expect underlying earnings to fall 6% this year, even though pre-tax earnings rose 9% in the first half of 2015. For me, this means Burberry’s shares could be a great contrarian pick.

Glencore

Glencore’s (LSE: GLEN) woes are also down to a combination of cyclical and structural problems. Falling commodity prices have hit Glencore particularly hard because the company failed to cut high cost production early enough and allowed debt to climb to uncomfortable levels.

The company is finally responding to these issues, with plans to raise fresh capital, sell non-core assets and suspend production from two of its loss making copper mines in Africa. Unfortunately, though, commodity prices continue to deteriorate. So, unless there are signs that commodity prices are finally bottoming, I would still prefer to avoid Glencore’s shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »