Buying turnaround stocks is full of risk. Sometimes, there is a lack of a clear path towards improving financial and share price performance. This can make many investors disinterested in buying, but it can also mean the potential rewards on offer are relatively high. Here are two companies which may not be performing as well as envisaged, but which could record strong comebacks over the medium term.
A changing business
Reporting somewhat downbeat results on Thursday was technology, content and services company BNN Technology (LSE: BNN). It reported a decline in revenue of over 72% versus the prior year as it pivoted into a technology company. It began to generate revenues from its new business model in the second half of the year, which meant that its operating loss increased from £9.3m to £16.5m in 2016.
Much of the fall in profitability was due to investment in people and technology. The company also announced a £25m placing on Thursday which could help to improve its overall performance and create a sustainable growth stock. It has already made progress in signing mobile content and competition deals, while other commercial deals in its payments business indicate that the company could be on the cusp of a more profitable period.
Certainly, there is a considerable amount of risk for the company’s investors. Any company which makes major changes to its business model could encounter short-term challenges which may lead to disappointing financial performance. However in the long run, BNN seems to have the scope to mount a successful turnaround.
Also raising new funds for future growth recently was engineering solutions company Laird (LSE: LRD). It raised approximately £185m from a rights issue. The proceeds will be used to reduce borrowings and should strengthen the company’s financial position. This comes after a rather disappointing set of results, where underlying profit before tax declined by 30% and operating cash flow was 48% lower than in the previous year.
Profitability was adversely affected by weaker sales and margin pressure in the Precision Metals division, as well as a challenging environment elsewhere in Laird’s business and losses from the Novero acquisition. And with a decline in earnings of 11% forecast for the current year, things look set to get worse before they improve for the company.
However, next year Laird is set to return to positive earnings growth. Its bottom line is forecast to rise by 6%, which has the potential to shift investor sentiment higher. With its shares trading on a price-to-earnings (P/E) ratio of 15.2, they seem to offer value for money versus a number of sector peers. Certainly, a turnaround will take time, but for patient investors Laird could prove to be a worthwhile recovery stock for the long term.
Peter Stephens owns shares of Laird. 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.