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Two turnaround stocks for 2018

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It’s often said in the investment world that a “rising tide lifts all boats.” The phrase refers to the fact that a bull market can push share prices across the whole market up. While the current bull market has pushed many UK stocks higher this year, it’s fair to say that not all boats have risen with the tide.

Today I’m looking at two out-of-favour stocks that are trading 20% or more below their 52-week highs. Both have turnaround potential in my opinion.

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Advertising giant WPP (LSE: WPP) is a favourite company of mine. While advertising is a cyclical industry, WPP has an outstanding track record of revenue and profit growth, as well as a fantastic dividend growth history.

Over the last five years, revenue has grown from £10bn to £14.4bn and net profit has increased from £840m to £1,400m. Meanwhile, the dividend has been hiked from 24.6p to 56.6p per share, as the company has lifted its payout ratio.

2017 has been a poor year for advertising-related companies. Due to political and economic uncertainty, many companies have slashed their advertising budgets. WPP has suffered. Revenue this year is expected to fall to £13.2bn.

As a result, the shares have been sold down significantly. Trading above 1,900p in March, the shares fell to around 1,250p in November, although they’ve since rebounded to around 1,350p. At that price, I see long-term value on offer. Here’s why.

While advertising conditions may remain challenging in the short term, events next year such as the World Cup and the Winter Olympics may provide a boost. In the long term, WPP’s exposure to digital advertising (40% of revenues) and fast-growing markets such as China and India, provides an opportunity for growth. It stated in October that it remains well positioned to deliver on long-term targets, which include headline diluted EPS growth of 10% to 15% per year.

The recent share price fall enables investors to pick up the shares at a low forward P/E ratio of just 11.2. That looks cheap. Given that the company is buying back its own shares (396m in the first nine months of 2017), management clearly believes the shares are cheap too.

The yield also looks very attractive. A projected payout of 60.5p this year equates to a yield of 4.5% at the current share price. That distribution is expected to be covered twice by earnings and is also expected to grow in FY2018. Overall, I believe WPP offers excellent turnaround potential from here.

Virgin Money Holdings

Another stock that I think could rebound is Virgin Money Holdings (LSE: VM).

The challenger bank has seen its share price fall from 350p in February to around 280p today. Brexit uncertainty and lower growth forecasts have taken their toll on the company. Yet at the current valuation, I believe the shares look cheap.

For FY2017, analysts expect revenue and net profit growth of 12% and 17% respectively. The dividend is forecast to be lifted 12%, which takes the prospective yield above 2%. Analysts expect a further dividend hike of 10% for FY2018. Any company growing its dividend at that kind of rate warrants closer inspection, in my opinion.

Rival challenger bank Aldermore was recently snapped up at a valuation of around 10 times this year’s earnings. As a result, I believe Virgin’s forward P/E of 7.6 looks too cheap.

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Edward Sheldon owns shares in WPP and Aldermore. 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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