2 FTSE 250 turnaround stocks I’d buy right now

G A Chester sees strong turnaround potential in these two FTSE 250 (INDEXFTSE:MCX) stocks.

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There seems to be an abundance of stocks with turnaround potential for investors to consider right now. My colleague Harvey Jones recently looked at two strong candidates in the FTSE 100. Today, I’m going to give my views on the valuations and prospects of another two in the FTSE 250, subprime lender Provident Financial (LSE: PFG), which released its half-year results today, and medical devices firm ConvaTec (LSE: CTEC).

High drama

Over the last couple of years, Provident Financial’s shareholders have witnessed a catalogue of unwelcome dramas. A bungled attempt to change the operating model of the group’s doorstep lending division, upheaval in the boardroom, investigations by the Financial Conduct Authority (FCA), a rescue rights issue, fighting off a hostile takeover bid by small-cap upstart Non-Standard Finance — you name it, Provident’s shareholders have probably seen it!

Confidence in recovery

Today’s half-year results will have come as a welcome relief for investors, with adjusted operating profit stable at £74.9m. Exceptional costs were much reduced, despite expenses of £23.6m to stave off Non-Standard Finance’s hostile bid.

Provident delivered strong new business volumes while maintaining stable delinquency rates, and chief executive Malcolm Le May described the results as “in line with our internal plans.” In further good news, he added: “We are pleased to announce reinstatement of an interim dividend of 9p per share, which reflects our confidence in the ongoing recovery of the group.”

With the company also announcing the FCA investigation into its Moneybarn business “is close to being concluded with the expected financial impact within the previously announced financial provisions,” the shares responded positively when the market opened this morning.

Currently trading at 435p — up 4.7% on the day — the stock has a forward price-to-earnings (P/E) ratio of 8.8, and a prospective dividend yield of 6.2% on a forecast full-year payout of 27p. The firm’s turnaround now looks close to gaining serious momentum, and the current valuation is very attractive, in my opinion. I rate the stock a ‘buy’.

Strong turnaround potential

I made a big mistake in first tipping ConvaTec far too soon after its stock market debut. However, I’ve continued to see value in the stock at lower prices, due to it owning some best-in-class medical devices, notably in ostomy care and wound care.

The last time I wrote about the company in March, the share price was 134p, the forward P/E was 12.5, and the prospective dividend yield was 3.25%. Since then, the company has announced the appointment of its new permanent chief executive and issued a first-quarter trading update.

Karim Bitar, poached from animal genetics specialist Genus, will take up the chief exec role on 30 September. It looks a good appointment as he’s highly regarded for leading transformational change at similar businesses.

Meanwhile, the company’s Q1 results in May were sufficiently encouraging to bolster my view that there’s strong turnaround potential here. The shares are up 15% to 154p since March — forward P/E now 14.8 and prospective dividend yield 2.9% — but I continue to rate the stock a ‘buy’.

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G A Chester 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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