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Why I might sell this turnaround stock and buy Barclays plc instead

Choosing the right time to sell a turnaround stock is essential. Get it wrong, and you may miss out on the profits your stock picking should have delivered.

Today I’m going to look at two turnaround stocks from my own portfolio. Both have recently published results. One has already performed very well, while the other has disappointed so far.

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This asset play has come good

Hargreaves Services (LSE: HSP) has its roots in the coal business. The group used to mine, trade and transport coal for big UK coal consumers like power stations and steelworks. Unfortunately, most of the group’s one-time customers have closed down, or will do soon.

Over the last couple of years, Hargreaves has gone through a complex and painful restructuring to exit the UK coal business. I’ve built a holding through this period because I thought the stock’s valuation didn’t reflect the underlying value of the group’s property portfolio and other surplus assets.

Chief executive Gordon Banham — who has a 7.77% shareholding — has diversified the business and started to realise value from these assets. Today’s full-year results give a good idea of progress so far, and the potential for further gains.

Underlying pre-tax profit from continuing business rose from £3m to £7.7m last year. Underlying earnings rose from 5.6p to 17.9p per share, while the total dividend was increased from 2.3p to 7.2p per share. Net debt remains modest, at £15.7m.

These results put Hargreaves’ stock on a trailing P/E of 20 with a dividend yield of 1.9%. Clearly that isn’t cheap. So why invest?

This is the opportunity

Hargreaves recently secured planning permission for a large housing development near Edinburgh. It also has a number of other sites with development potential.

According to today’s results, the firm’s property portfolio has a current market value of £49.4m. When combined with the group’s other assets, this gives a net asset value per share of 491p. That’s 29% more than the current share price of 380p.

I plan to continue holding but will keep the position under review. I think Hargreaves’ long-term growth prospects are limited. Much of its value lies in liquidating its surplus assets. So the stock may continue to trade at a discount. I may decide to sell later this year to reinvest the cash in stocks with more growth potential.

I’m still confident

One stock which investors can buy at a big discount to its book value is Barclays (LSE: BARC). This bank has performed poorly this year, losing 6% of its market value while most rivals have made gains. At today’s price of 210p, the shares trade at a 26% discount to their tangible net asset value of 284p.

There’s no doubt that Barclays’ turnaround has taken longer than expected. But I think it has also suffered from poor market sentiment and the underlying performance of the bank is improving. I think the stock remains attractive as a value investment.

The group’s recent half-year results were clouded by some exceptional costs relating to the partial sale of its African business. But excluding these, adjusted earnings rose by 18% to 7.1p per share during the first half of the year.

The bank now trades on a forecast P/E of 11.4 for 2017, falling to 9.5 in 2018. In my view, continued progress should lead to decent gains for shareholders from current levels. I continue to hold.

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Roland Head owns shares of Barclays and Hargreaves Services. The Motley Fool UK has recommended Barclays. 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.