2 value traps I’d avoid right now

If I mention this much-maligned company’s name most investors will flee instinctively. So I’ll redirect attention to its rather intriguing set of valuation and financial metrics to ensure the stock gets a fair hearing: a forward P/E ratio of 11.8 and an enviable 5.47% dividend yield covered 1.87 by earnings.

This intriguing set of numbers belongs to none other than Marks and Spencer (LSE: MKS), whose much-discussed problems have led to an 18% collapse in share prices over the past year alone. But despite what appears to be a very cheap share price and what committed optimists may point to as a sign of a nascent turnaround, I’d still steer clear of this struggling retailer.

My main cause for concern is that the business plan long ago came unmoored from its core competencies that made it a beloved household brand. A series of CEOs have been confronted by the declining footfall all department stores face and the rise of fast fashion retailers They embarked on plans to appeal to younger crowds with hipper clothes and deeper discounts.

Thankfully current CEO Steve Rowe seems to realise these plans were foolhardy (rightly showing particular disdain for the gold hot pants he found for sale in a Norwich branch) and has promised to return M&S to the core, quality clothes it was long known for. Alongside simplifying clothing options, Rowe plans to close scores of unprofitable stores at home and abroad and add a further 200 M&S food locations, maximising the firm’s strongest product area.

This plan makes sense. But investors with long memories will recall that new M&S CEOs have failed to deliver on dramatic turnaround plans several times in the past. While the company’s shares look cheap and this latest turnaround plan makes considerable sense, I’ll be avoiding M&S until we see several successive quarters of like-for-like growth.

If you can’t sell wine what can you sell?

Another struggling retailer with an ambitious turnaround plan is Majestic Wine (LSE: WINE). The discount retailer is plotting to increase annual sales by roughly a quarter to £500m by growing customer count rather than store count, investing in overseas growth markets such as the US and rolling out its online offering, Naked Wines.

Once again, like M&S, this turnaround plan makes good sense. Majestic does have solid market share in the UK and online sales were up a very encouraging 26.7% year-on-year in H1 2017.

Yet I remain cautious. Most importantly, Majestic has yet to prove that new customers are profitable. Personally, I love Naked Wines but I find it difficult to believe the company is making much profit when I’m offered six bottles of decent wine for £30 or less. And Majestic’s bottom line seems to show this is the case as the company swung from a £4.3m profit in H1 2016 to a £4.4m loss a year later.

Now its perfectly possible that these new customers such as myself will become profitable in the future as the company rolls out membership programmes or upsells us better wines. But until I see some proof of this I’ll be leery as Majestic’s net debt rises and profits sink due to big investments related to the turnaround plan.

Is buying into a turnaround the way to be a stock market millionaire?

To find out I recommend reading the Motley Fool’s report, 10 Steps To Making A Million In The Market. This common sense guide shows how retail investors can build great wealth even while starting out with as little as £10,000

And the best part is the Motley Fool has made this report absolutely free and with no obligation for our loyal readers.

Ian Pierce 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.