Why I’d buy this turnaround stock after today’s 20% share price fall

This company appears to have turnaround potential despite releasing a disappointing update.

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Buying shares in a company that has fallen 20% in one day inevitably means the risk of loss in the short term is high. A further decline in the company’s valuation could take place in the short run as the market absorbs the news flow which has pulled its share price lower.

However, in the long run such companies can deliver high returns for their investors. Sometimes, the stock market can overreact to negative news, and this can create a wider margin of safety for long-term investors to take advantage. With that in mind, here is one stock which could be worth buying for the long run after its slump on Monday.

Difficult period

The company in question is medical product and technology company Convatec (LSE: CTEC). The business reported supply issues in its Advanced Wound Care and Ostomy Care divisions, with the movement of manufacturing lines from Greensboro in the US to Haina in the Dominican Republic not progressing as planned.

The problems include a delay in obtaining regulatory certification and they are expected to result in the loss of the 40 basis points of margin benefit achieved as a result of the margin improvement programme in the first half of the year. They are also due to wipe out most of the 90 basis points margin benefit from 2016.

Clearly, this is hugely disappointing for the company and is a major setback. However, it expects to achieve progress on margin improvement once the supply issues in Haina are resolved. It has also been able to expand its product portfolio across products and geographies. This could allow it to deliver further growth in the long run.

With Convatec now trading on a price-to-earnings growth (PEG) ratio of just 1, it appears to offer a wide margin of safety. Therefore, while its short-term share price movements may be volatile and its future is uncertain, it could post high investment returns in the long run.

Improving outlook

Also offering impressive investment prospects is industry peer Alliance Pharma (LSE: APH). The company’s financial performance continues to improve, with it forecast to post a rise in its bottom line of 14% in the next financial year. This puts it on a PEG ratio of just 1, which suggests that it also offers a wide margin of safety and could be worth buying right now.

Alliance Pharma may only yield 2.2% at the present time. However, with dividends covered 3.1 times by profit it could raise dividends at a rapid rate – especially since its bottom line growth outlook is highly positive.

As well as this, the company has low positive correlation with the wider economy due to the nature of its business. It could therefore offer defensive appeal should the outlook for the UK economy deteriorate in the medium term. If this occurs, Alliance Pharma’s international growth opportunities could also help it to outperform a number of its sector peers in the long run.

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.

Peter Stephens owns shares in Alliance Pharma. 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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