85%-faller Mothercare isn’t the only turnaround stock I would buy today

This share could deliver a successful recovery alongside Mothercare plc (LON: MTC).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

In the last year, Mothercare’s (LSE: MTC) share price has fallen by over 85%. The business has experienced an incredibly challenging period which has caused it to release profit warnings and disappointing financial figures. In the short term, further pressure on its valuation cannot be ruled out.

However in the long run, the retailer could now offer turnaround potential. It appears to have a wide margin of safety, with investors seemingly having priced in further disappointment for the mother and baby goods business. As such, it could be worth a closer look alongside another company which is expected to deliver improving levels of profitability over the medium term.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Uncertain outlook

The key Christmas period was a relatively disappointing one for Mothercare. It was unable to deliver the performance which it and the market was expecting. A lack of discounting for most of the period seems to have been a key reason for its sub-standard performance, while discounting late in the season meant that gross margin was relatively weak.

This comes after a period where the company appeared to be putting in place an improved strategy. Now, though, its future prospects appear to be highly uncertain. This could mean that there are more challenges ahead for the business – especially since the outlook for UK consumers is downbeat due in part to inflation being above wage growth.

Improving outlook

Despite the problems it faces, Mothercare is expected to report a rise in its bottom line in the 2019 financial year. Its earnings are due to increase by 30%, and then by a further 81% in the 2020 financial year. Clearly, there is scope for these figures to change and the company may miss its guidance due to difficult trading conditions. However, the figures also serve to show that the company may be able to deliver a turnaround faster than the market is currently expecting.

With the stock having a price-to-earnings growth (PEG) ratio of 0.1, it seems to offer growth potential at a reasonable price. While at the riskier end of the investment spectrum and currently experiencing financial uncertainty, it could be worth a closer look for less risk averse investors.

Future potential

Also offering turnaround potential is oil and gas production company Gulf Keystone Petroleum (LSE: GKP). It released results for the 2017 financial year on Wednesday which showed a profit for the first time since its entry into Kurdistan. Its net profit of $14.1m shows that it’s moving in the right direction, with significant operational progress having been made in recent years.

In 2017, the company met its gross production target, delivering average production of 35,298 barrels of oil per day (bopd). It also remains confident of meeting its near-term target of 55,000 bopd as it invests more heavily into its Shaikan project.

Looking ahead, Gulf Keystone Petroleum is expected to report a rise in earnings of 194% in the current year, followed by additional growth of 82% next year. Since it trades on a PEG ratio of 0.1, it appears to offer a worthwhile risk/reward ratio for the long run.

More on Investing Articles

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Best British dividend stocks for July

We asked our freelance writers to share the top income stocks they’d buy in July, which included Dividend Aristocrats and…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »