2 brilliant turnaround stocks that could make you rich

G A Chester reveals two turnaround stocks that could deliver market-busting returns.

| 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.

Shares of Daily Mail & General Trust (LSE: DMGT) are trading 2% down at 633p after the media group released a trading update today for its financial year ended 30 September.

It said conditions remain “challenging” for some businesses in the group but advised: “The outlook for the Group as a whole is in line with market expectations, with adjusted earnings per share towards the higher end of the range and adjusted profit before tax towards the lower end of the range.”

Major changes

DMGT has recently undergone management changes with a new chief executive and finance director. One of the first major things the company did under the new CEO was reduce its 67% stake in fellow mid-cap listed media group Euromoney Institutional Investor (LSE: ERM) to 49%.

Euromoney will cease to be a subsidiary and will be accounted for as an associate. However, the change is more than a paper exercise and the tangible benefits of it for both companies are part of the reason I reckon they could be brilliant turnaround stocks from the levels they’re currently trading at.

De-ratings

Before coming to their turnaround prospects, the tables below show where the two companies are at today, compared with their last share-price highs of February 2014.

DMGT Share price Earnings per share Dividend per share Earnings multiple Dividend yield
February 2014 1,073p 55.7p 20.4p 19.3x 1.9%
Today 633p 52p 22.8p 12.2x 3.6%
Difference -41% -7% +12% -7.1 +1.7

 

EUROMONEY Share price Earnings per share Dividend per share Earnings multiple Dividend yield
February 2014 1,385p 71p 23p 19.5x 1.7%
Today 1,160p 74p 28p 15.7x 2.4%
Difference -16% +4% +22% -3.8 +0.7

As you can see, the market has de-rated both companies. DMGT’s earnings per share (EPS) has declined 7% but its share price has dropped a massive 41%. As a result, the multiple of 19.3 times earnings investors were paying back in 2014 has dropped to just 12.2 times for investors buying today. Meanwhile, the combination of the falling share price and the increasing dividend (still well covered by earnings) means the yield has risen from 1.9% to 3.6%. It’s a similar story, only less pronounced, for Euromoney.

Turnaround prospects

I believe both companies have prospects of delivering good earnings growth in the coming years. If so, share price rises will almost certainly be given an extra boost by the market affording the companies higher earnings multiples. Even if the multiples don’t reach the previous 19-odd levels, a re-rating could still add significantly to the gains.

The reduction of DMGT’s stake in Euromoney means the latter’s balance sheet is now independent of DMGT’s. This has increased Euromoney’s financial flexibility to be acquisitive and add to its already well-respected brands and high-quality stream of recurring subscription revenues.

At the same time, DMGT has been able to reduce net debt from the proceeds of the share sale, likewise increasing its financial flexibility. This will help it pursue its strategy of allocating capital investment in market-leading positions, both organically and through acquisitions.

Both companies have good management in my view and look well capable of executing on what also appear to me to be sound strategies. On the basis of reinvigorated earnings growth and rising earnings multiples if this plays out, I rate both stocks as very buyable.

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.

G A Chester has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Down 23%, are Greggs shares a long-term bargain?

Christopher Ruane slices into some possible pros and cons of buying Greggs shares for his portfolio after they slid by…

Read more »

Investing Articles

This boring FTSE 250 stock has an incredible earnings forecast!

This FTSE 250 stock has moved sideways for years. It certainly hasn’t rewarded shareholders. However, things could change in the…

Read more »

Investing Articles

Make or break: could US trade tariffs hurt the UK stock market?

Mark Hartley examines the knock-on effect that Trump tariffs could have on the UK stock market and considers a stock…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

I don’t care if my passive income stock Phoenix Group doesn’t rise this year – I’ve got the 10.1% yield!

A firm’s yield moves in the opposite direction to its share price, so with my core passive income holdings I…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Vodafone’s share price is down 13% to 69p despite promising Q3 results, so it is an unmissable bargain for me?

Vodafone lost ground after its recent results, but they seemed promising to me, which leaves the share price looking significantly…

Read more »

Buffett at the BRK AGM
Investing Articles

Is Warren Buffett right about this 1 thing when it comes to Lloyds shares?

With the words of Warren Buffett ringing in his ears, our writer considers whether the Lloyds share price will do…

Read more »

Investing Articles

The FTSE 100 is behaving remarkably right now!

After years of underperforming global markets, the FTSE 100 has suddenly sprung to life. Indeed, it's rushed ahead to overtake…

Read more »

Investing Articles

3 passive income ideas to consider with FTSE 100 shares

A steady or lump sum investment in FTSE 100 shares and funds can create a formidable second income for investors.…

Read more »