MENU

2 turnaround stocks I’d buy before 2018

2017 has been a rough year for UK retail champion Marks & Spencer (LSE: MKS). The well known high street champion has struggled to compete with the likes Boohoo.Com in the fashion department, while competition in the food market has caused the company to slow its planned Simply Food store opening programme. These problems have weighed on investor sentiment, and the shares have struggled to tread water for much of the year. 

However, as we head into 2018, I believe that it could be time to snap up shares in this struggling retailer as its recovery plan starts to gain traction. 

Making headway 

Next year will be the first full year Archie Norman holds the chairman’s position. Mr Norman took over the chairmanship at the end of the summer and has been getting to know the business ever since. 

He is best known for rescuing supermarket group Asda from bankruptcy, and the City has high hopes for his time at the UK’s largest clothing retailer. The big question investors will be asking, is if he has what it takes to return M&S to growth, after more than a decade of disappointments? 

I believe that this will become clear next year. There are already some signs that the business is improving (clothing revenue stopped falling in the six months to September 30, and full-price sales increased 5.3%), giving him a tailwind to help turn the business in the right direction. Considering his record, I think he will make some substantial positive changes to M&S in the months ahead, which should benefit shareholders. 

Investors will be paid to wait for this turnaround as shares in M&S currently support a dividend yield of just under 6%. The payout is covered 1.5 times by earnings per share so, despite the group’s problems, it looks as if there’s headroom to keep the distribution in place. 

Never made a loss 

European banks have a bad reputation, but Banco Santander (LSE: BNC) does not deserve to be tarred with the same brush. Unlike its European peers, Santander has not made a loss in over 100 years. The conservatively run bank is well diversified across many different markets, and despite being headquartered in Spain, that country only accounts for 12% (based on 2016 figures) of group profit. 

To help boost growth, in June, it acquired Banco Popular for the symbolic price of €1 after EU authorities declared the Madrid-based lender “failing or likely to fail.” To help fund the deal, Santander raised an additional €7.1bn of capital.

City analysts expect this deal to help boost earnings by 13% for 2018, giving earnings per share of 45.8p. Based on these estimates, shares in the bank are currently trading at a P/E of around 11. To me, this valuation seems cheap especially when you consider the fact that Santander is probably the best run bank in Europe.

If the company hits City growth targets in 2018, a re-rating could be on the cards. The shares offer a dividend yield of 3.7% while you wait. 

Sleep easy with dividends

Both M&S and Santander offer the potential for huge gains if the shares start a recovery next year. These stocks also support attractive dividends, so you will be paid to wait for a turnaround. 

Avoiding dividend stocks, especially when searching for turnarounds, can be costly. Indeed, over the long run, dividend income accounts for around half of equity returns. To help you avoid making this key mistake, and others like it, the Motley Fool has put together this free report.

The report is a collection of Foolish wisdom, which should help you streamline your investment process and avoid those companies that might cost you money. 

All you need to do to gain access is click here to download today. 

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo.com. 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.