2 turnaround stocks I’d buy before Christmas

Bilaal Mohamed picks out two former blue-chips as potential long-term recovery plays.

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It’s that time of year again folks, and the turkeys are getting nervous (apologies to all you vegetarians and vegans out there). As we’re well and truly into the ‘golden quarter’ for retailers, I thought it would be nice to take another look at some of those companies that have been under the cosh recently, and pick out the ones I feel were likely to bounce back over the medium-to-long term.

Profits warning

Europe’s leading specialist electrical and telecoms retailer, Dixons Carphone (LSE: DC), dropped out of the FTSE 100 earlier in the year after increased competition from online rivals and higher import costs had taken their toll on the company’s share price. The group, which includes the Currys, PC World and Carphone Warehouse brands is just the latest in a long line of retailers to have suffered at the hands of a Brexit-induced currency crash.

There was further pain ahead for shareholders in the form of a profits warning at the end of August, as weaker mobile phone sales and the effects of lower EU roaming charges led the company to admit that pre-tax profits for FY2017/18 would be well below previous market expectations. Unfavourable currency fluctuations have made handsets more expensive, and this in turn means that people are holding on to their mobile phones for much longer.

Sterling effort

But sterling has been fighting back, and although a full recovery is still a long way off, Dixons will be hoping that the pound continues on its upward trajectory thereby helping to push down import costs. Another factor that could act as a catalyst for recovery is the recent launch of new iPhones. The company will be hoping the new handsets will be a hit with customers, especially over the all-important Christmas period.

With the shares now trading at just six times forward earnings, and offering a mighty 6.6% yield, I think Dixons could prove to be a shrewd, if not brave, contrarian play for those with a longer-term view.

A right royal recovery play

Also crashing out of the blue-chip index earlier this year was Royal Mail (LSE: RMG). It’s still hard to believe that investors would abandon such a great British institution to such an extent that its shares would drop by over 30% in less than four years. It seems there’s no room for sentiment in a world of hard facts and data, as the 500-year-old business continues to suffer from dwindling letter volumes as email takes over as our favoured method of communication.

But worry ye not. The festive period brings with it lots of nice packages, in the form of gifts, delivered lovingly to your door by who else but Royal Mail. The boom in internet shopping has given rise to an increase in parcel volumes, and I see this an area of obvious growth. Management has also worked hard to improve performance in recent years with extensive restructuring and cost-cutting programmes well under way.

Trading on a price-to-earnings ratio of just 11, and supported by an adequately-covered dividend yielding almost 6%, Royal Mail might well turn out to be a right royal recovery play.

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.

Bilaal Mohamed has no position in any 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.

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