Turnaround stocks do not always work out as planned. Sometimes their risks can be underestimated, or their disappointing profitability may be more difficult to improve than expected. However, in some cases they can offer exceptionally high rewards. Investor sentiment in struggling companies is often relatively low. This can mean there is significant upside potential if a recovery is successfully delivered.
With that in mind, here are two shares capable of delivering improved financial performance that may translate into a rising share price.
Reporting on Tuesday was business software, cloud solutions and managed services specialist K3 (LSE: KBT). The company announced that trading over the remainder of the financial period to 30 November 2017 has been in line with management expectations. It has signed numerous new customers in recent months, with there being encouraging growth in the Global Accounts division.
In addition, the company has also completed its operational resource review. It has decided to integrate the Microsoft Dynamics business into a single unit. This will incur additional costs in the short run, but in the long term could mean the business is more streamlined and efficient.
Looking ahead, K3 is forecast to post another loss in the current year. However, next year it is expected to deliver a black bottom line. Although it trades on a price-to-earnings (P/E) ratio of 21 using next year’s forecast earnings figure, growth potential over the medium term could be high. As such, after what may prove to be two years of losses, now could be the right time to buy a slice of the business for the long term.
Also struggling at the present time within the telecoms, media and technology sector is ITV (LSE: ITV). The company is a highly cyclical business and is therefore expected to report a decline in earnings of 9% in the current year. While the UK’s economic performance has held up reasonably well despite the EU referendum decision and the uncertainty it has created, GDP growth and general business confidence has declined. As such, a 9% fall in the company’s profit is not particularly surprising.
Next year though, ITV is expected to return to positive profit growth. It trades on a P/E ratio of just 10.6, which indicates that it has a wide margin of safety at the present time. Furthermore, the company has a dividend yield of 5.6%, which may attract new investors to the stock after inflation has now risen to 3.1%. And with dividends being covered 1.7 times by profit, they appear to be highly sustainable at their current level.
Looking ahead, ITV may experience further challenges if Brexit proves to be a negative for the UK economy. However, investors appear to have priced-in further difficulties for the company and for its sector, judging by current valuations. As such, now could be the right time to buy the stock, with its capital growth and income return potential being high.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended ITV. 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.