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Why I’d buy Carillion plc and this growth stock in November

It’s been an enormously difficult year for investors in Carillion (LSE: CLLN). Its share price is down over 80% and recent updates have shown just how challenging its outlook could prove to be. A slowing market, lack of strategy direction and changes to its management team could mean that things go from bad to worse in the short run.

However, in the long run the company (and the wider support services sector) could offer investment potential. There appear to be wide margins of safety on offer and while volatility may be high in the short run, there could be scope for share price appreciation from Carillion and this sector peer.

Growth potential

The company in question is Balfour Beatty (LSE: BBY). It was in the news on Monday announcing the sale completion of its professional services business, Heery International. This fits in with the company’s overall strategy and could help to improve its efficiency over the medium term.

Certainly, the company has experienced its own challenges. It reported two consecutive years of losses in 2014 and 2015 as it encountered issues with legacy contracts. While it’s taking time to turn the business around, gradually moving away from past problems, it moved back into the black last year and is forecast to post a rise in earnings of 65% in the current year. That should be followed by further growth of 60% next year.

Such impressive gains could improve investor sentiment in the stock. It trades on a price-to-earnings growth (PEG) ratio of just 0.2 at the present time, and this suggests it has a margin of safety, which is wide enough to merit purchase for the long term.

Turnaround potential

Clearly, Carillion faces a long road back to financial health and earnings growth. However, the same could have been said about Balfour Beatty just a few years ago. The former released multiple profit warnings and saw its share price decline by over 50% from peak to trough. Now though, it’s making strong progress with a turnaround plan and could hold significant investment potential for the long run.

As such, Carillion could be a strong turnaround play. It trades on a price-to-earnings (P/E) ratio of just 2, which suggests the market may have overdone its recent share price fall. Certainly, there is scope for significant falls in its profitability over the medium term. But with its bottom line expected to remain well in the black in 2017 and 2018, there could still be a sound business on offer for investors who are willing to accept high volatility and uncertainty.

Of course, the stock is a relatively risky option. But with high risk comes high potential reward, which could make Carillion a worthwhile option for less risk-averse investors with a long-term timeframe.

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Peter Stephens owns shares in Carillion. 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.