One turnaround stock I’d buy and one I’d sell in 2018

Royston Wild looks at two shares with very different earnings prospects.

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The New Year brings plenty of opportunity for shares to rebound that have been under severe pressure in 2017 and possibly further back.

One such stock I’m personally tipping to thrive in 2018 is Centamin (LSE: CEY), a positive outlook for gold prices and increasing production rates looking likely to get profits moving in the right direction again following recent pressure.

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City analysts are also predicting the bottom line over at Game Digital (LSE: GMD) to improve this year, and a bubbly trading update on Thursday has added extra fuel to expectations of an imminent improvement.

Sales rise

The games colossus announced today that gross transaction values (or total sales before the deduction of revenue deferrals related to loyalty points) rose 3.8% during the 23 weeks to January 6. And things were even better during the peak festive period spanning November 1 to January 6, Game Digital reporting that GTVs soared 5.2% compared to a year earlier.

Chief executive Martyn Gibbs attributed the solid performance to “our ability to capitalise on the strong customer demand for Nintendo Switch, the continued adoption of PlayStation hardware and VR sales, the launch of Microsoft’s Xbox One X and a more appealing line-up of new software titles compared to the same time last year.”

In other news Game Digital advised that its cost-stripping programme continued to make inroads, the business making further savings in Britain ahead of its previously-estimated full year savings of around £4m.  And it added: “Further cost saving initiatives [are] under way to offset the margin impact of the sales mix change in the UK Retail business.” Margins ducked in the 23-week period thanks to growing sales of lower-margin hardware like Nintendo’s Switch console.

Still too risky

However, I am less than convinced by the company’s ability to stage a sustained sales rebound as the structural shift in the video games industry from traditional retailers like Game Digital to online platforms steadily heats up.

This attack culminated in Game Digital finally slipping into the red last year (it chalked up losses per share of 3.8p per share in the 12 months ending July 2017).

Although City analysts are predicting the fruits of its recovery plan to help losses narrow to 1.2p in fiscal 2018. In my opinion, deteriorating consumer confidence and the aforementioned impact of digital gaming suggest that Game Digital may find it a struggle to turn around its battered bottom line.

Glistening giant

Given the choice, I would be far happier to stash the cash in Centamin as the scope for extended geopolitical turmoil in 2018 and later, added to rising chatter that stock markets are looking a tad overcooked, looks likely keeps precious metals well bought.

Indeed, latest data from the World Gold Council this week again showed how the store-of-value assets remain popular in the current climate, with global gold ETF holdings jumping 8.4% during 2017.

With Centamin also lighting a fire under production rates, City analysts are expecting the mining giant to bounce from a predicted 46% earnings fall in 2017 with a 14% advance in the following period.  And I for one am expecting profits to continue booming long into the future, thus making the business an attractive selection despite its slightly-heavy forward P/E ratio of 16.9 times.

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Royston Wild 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.

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