One turnaround stock I would buy today, and one I would avoid

Harvey Jones looks at two companies looking to climb out of the recovery position.

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I can tell you exactly when stockbroker Charles Stanley Group (LSE: CAY) started turning things around after a troubled few years. It was when I sold the stock, in November last year. As so often happens, the moment I released this £180m company from my portfolio, it flew.

Let it go

Charles Stanley is flying even higher after today’s final results, with the share price up 3.94% in early trading. Its current share price is 361p, up nearly 24% year-to-date, delighting wise investors who stayed the course. Today it reported profit before tax of £8.8m, turning around a £300,000 loss in 2016. Full-year reported revenue was exactly the same as the previous year at £141.6m, despite disposal of non-core activities. Its balance sheet has been strengthened, with group cash balance of £58.4m against £48.4m before.

In further good news, funds under management and administration rose 17.1% to £24bn, while core business operating margins more than doubled from 3.1% to 7.1%. The company management is aiming for 15% by 2020. The icing on the cake was a 20% increase in the total 2017 dividend to 6p a share, up from 5p in 2016.

Charles Stanley, I presume

Chief executive Paul Abberley thanked the company’s transformation programme for delivering “increased profitability, more satisfied clients and improved staff engagement”, and said the company is now focusing on improved governance, better cost control and a revised remuneration policy. This should make it more streamlined and focused, boosting profitability.

Charles Stanley’s aim to become the UK’s leading wealth manager by 2020 does sound somewhat ambitious and Brexit is clearly a concern, but with City forecasters predicting 54% earnings per share growth in 2018 and 38% in 2019 the outlook is bright (painfully so, given my recent sale). A forecast valuation of 17.1 times earnings is therefore undemanding, and today’s 1.5% yield is forecast to hit 3.9% in 2019. A stock market meltdown could offer a short-term setback, or conversely, an even more exciting buying opportunity. I should never have sold.

Here we go round again

Fashion house Mulberry Group (LSE: MUL) specialises in timeless British luxury and recent share price performance has been stylish, with the stock up 57% in the last three years. However, it is down 2% this morning after its preliminary results for the year to 31 March disappointed.

There are some handsome numbers in there, with total revenue up 8% to £168.1m, profit before tax up 21% to £7.5m and cash rising from £14m to £21.1m. However, investors were scared away by the slowing sales growth in recent weeks. Although full-year sales rose 8% to £128.3m, with like-for-likes up 5%, over the 10 weeks to 3 June retail like-for-likes (including digital) pipped up just 1%.

Retail fail

Gross margins also dipped slightly from 62% to 61.6%, due to a large number of new designs introduced during the first six months, although management noted that production efficiencies returned to normal levels during the second half of the year

Today’s statement also showcased a 6.6% increase in operating expenses to £96.5m, primarily due to higher retail store costs of £3.7m and increased marketing, advertising and promotion costs of £1.6m. Mulberry’s turnaround clearly has a little further to go.

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Harvey Jones doesn't hold shares in any company mentioned in this article. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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