This 6% yielder isn’t the only turnaround stock that could double in 2018

These troubled stocks aren’t without risk, but could deliver big wins for shareholders.

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Today I’m looking at two mid-cap stocks which have both fallen by more than 50% over the last year.

Neither company has reported any real change in their underlying business, but both face specific problems which have spooked the market. If these problems can be resolved, then I believe both stocks could potentially double from current levels.

Outside interference

Tanzania-focused gold miner Acacia Mining (LSE: ACA) fell by another 10% on Monday as investors digested the group’s latest financial results.

A government ban on exporting gold and copper concentrate hit the group hard in 2017 as this form of export accounted for around 30% of revenue. Mining activity has been scaled back, but this didn’t stop the group clocking up a painful $707m net loss for the year ending 31 December.

In fairness, the majority of this loss resulted from a $644m non-cash impairment charge against the reduced value of the group’s mining assets. But it also reported $264m of lost revenue and a cash outflow of $237m last year as a result of the export ban.

What hope?

A year ago, Acacia was a profitable, dividend-paying stock with net cash of more than $300m. Today the cash balance has fallen to $81m and the outlook for 2018 is uncertain. The group’s majority shareholder, Canadian giant Barrick Gold, is working to negotiate a settlement with the Tanzanian government. A proposal is expected during the first half of this year.

This is very much a special situation — if things go well, Acacia’s earnings and shares could rebound rapidly over the next two years. But there’s no guarantee of this. Even if a settlement is agreed, reports suggest it could include back payment of up to $300m in tax.

The shares currently trade on a 2018 forecast P/E of 6.2. This may seem cheap, but shareholders need to accept the risk of further losses.

A Woodford 6% yielder

Roadside assistance group AA (LSE: AA) is one of the UK’s best-known brands. But the group’s share price has skidded 54% lower over the last year despite stable trading. Investors have been spooked by lacklustre growth and concerns about debt levels.

In my view, investors are right to be concerned. In its most recent accounts, the AA reported net debt of £2.7m. That’s equivalent to 6.7 times the group’s earnings before interest, tax, depreciation and amortisation (EBITDA). As a rule of thumb, a net debt/EBITDA ratio above 2.5 times is considered high.

A potential opportunity

The AA was loaded up with debt by its previous private equity owners, who floated the business in 2014. That’s a shame, because the business itself is very profitable and highly cash generative. Operating margin was 30% last year, and 92% of operating profit was converted to cash. With lower debt levels, this could be a great dividend stock — a view shared by fund manager Neil Woodford, who owns the shares in his income funds.

As things stand, the outlook is less certain. It’s not clear whether the company will manage to bring debt levels down without raising some cash from shareholders. The stock’s forecast P/E of 5.7 and prospective yield of 6.5% reflect this uncertainty.

In my view, risk and reward are finely balanced, but I’m staying away for now.

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.

Roland Head 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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