If you’re a contrarian investor on the lookout for turnaround opportunities, then you may be considering Rolls-Royce (LSE: RR) and Watchstone Group (LSE: WTG), formerly known as Quindell.
Both companies had a terrible 2015. But can they recover this year?
It wasn’t long ago that Rolls-Royce was the darling of the FTSE 100. The share price rocketed higher and higher, reaching a peak of 1271p in late 2013. But after a series of profit warnings, the stock has been in freefall, currently standing at 559p. It’s an astonishing fall from grace.
At first sight, Rolls-Royce seems a company with a bright future, being an aero engine manufacturer at a time when fuel prices are falling and global travel is booming.
But look a little closer and you’ll see the reasons behind the tumbling valuation. Alongside civilian aero engines, Rolls-Royce has a huge defence business, which has suffered badly as defence budgets around the world have been cut.
And Rolls-Royce also has a substantial business supplying turbines to the oil and gas industry. This was fine when record commodity prices meant this industry was storming ahead. But, now that the oil price is a third of what it was two years ago, expanding in this area no longer looks so clever.
That’s why this once strongly profitable firm is now lossmaking.
How can it be turned round? Well, it will need to focus on civilian air travel and to move away from defence and the oil and gas industry. But this will inevitably be a slow and difficult process. I see no turnaround in 2016. This is still one to avoid.
Watchstone Group is what was formerly known as Quindell – a legal services company. Like Rolls-Royce, it was a stock market darling a couple of years ago, only to fall to earth in spectacular fashion after it was laid low by an accounting scandal.
Small companies can be fragile. Whereas blue chips have the size and scale to withstand shocks, scandals can virtually finish off small-caps. This is what happened with Quindell.
I still believe that Quindell was, at its heart, a promising and fast-growing company with good prospects. But rumours of accounting impropriety meant that this firm was shorted to oblivion. In the end, the company board decided to sell legal services, which made up the bulk of the business, to law firm Slater & Gordon.
This meant that long-suffering shareholders at last have some of their money back. But just what are the investing merits of the Watchstone shares you now hold?
Well, this company is basically like Quindell in those early days: a small-cap with high hopes of making its way in the insurance and car sectors. However, it’s still lossmaking, and I would consider it too early to buy into what is currently a bit of an unknown.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.