The Motley Fool

Why these turnaround stocks could beat the Footsie in 2018

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Chart displaying growth
Image source: Getty Images.

When’s the right time to invest in turnaround stocks? It’s rarely possible to call the bottom, but one approach I’ve found useful is to look for situations where the stock falls following good news. This can be a sign that a buying opportunity is developing.

Down on good news?

I’m beginning to feel that education firm Pearson (LSE: PSON) could be an example of a turnaround that’s on the cusp of recovery.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The group’s shares fell by around 5% today after the company issued a full-year trading update for 2017. Management now expects to announce an adjusted operating profit for the year of £570m-£575m. Adjusted earnings per share should be around 54p, ahead of consensus forecasts of 50.1p per share.

The group’s net debt fell from £1.1bn to “around £0.5bn” over the last year, a level that I believe should be comfortable for this business.

But what about the future?

Pearson has generated a lot of cash from asset sales over the last year, including selling a 22% stake in book giant Penguin Random House. Although this has helped to repay debt, it will also reduce profits, at least initially.

The main focus of the slimmed down Pearson business is the US education market. The group is hoping to combat falling demand for printed textbooks by moving more aggressively into the e-book and rental markets.

The success of this plan isn’t yet certain. Underlying revenue fell by 2% last year and a further modest decline is forecast for this year. However, profit guidance for 2018 suggests that adjusted operating profit will be between £520m and £560m.

After making some adjustments, I estimate that the comparable figure for 2017 is £500m-£505m. So profits seem likely to rise this year.

These profit figures imply an operating margin of around 9%. With the stock on a forecast P/E of 14, I believe the shares could climb if Pearson can deliver on today’s guidance.

A difficult choice

Another tempting turnaround selection is broadcaster ITV (LSE: ITV), which has also won the support of fund manager Neil Woodford. The group’s shares have fallen by more than 35% from their 2015 peak, as the market priced-in the risk of falling ad sales and slower growth.

So far, nothing drastic has gone wrong with this business. As a result, ITV shares now trade on a forecast P/E of just 10.8 and offer a prospective yield of 4.6%.

What could go wrong?

Television advertising sales have been falling. Advertising revenue dropped by 3% in 2016, and the group expects this figure to have fallen by a further 5% in 2017.

The reality is that much of ITV’s growth in recent years has been driven by its decision to acquire many of the programme makers which supply the firm’s channels. I’m concerned that some of these acquisitions could prove to be one-hit wonders.

Despite this risk, ITV’s 18% operating margin remains tempting to me, given the stock’s modest valuation. And the group’s balance sheet also looks healthy, in my view.

It’s also worth noting that the group’s new chief executive, ex-easyJet boss Carolyn McCall, started work on 8 January. If Ms McCall can convince the market that this business will return to growth, then I think the shares could perform strongly this year.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Roland Head has no position in any of the 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.