The idea of buying turnaround stocks at a time when share prices are at record highs may seem rather strange. After all, the prospects for the global economy continue to improve and, with a bright outlook, many investors may prefer to buy shares which have strong growth forecasts ahead.
However, buying stocks that are cheap because of disappointing performance in the past could be a shrewd move. They may offer wide margins of safety as well as the potential for relatively high share price gains. With that in mind, here are two potential turnaround stocks that could be worth buying today.
Following last year’s profit warning, electrical and telecoms retailer Dixons Carphone (LSE: DC) reported an improved performance in its trading update on Monday. In the key Christmas period, it was able to deliver a rise in like-for-like (LFL) revenue of 6%, with UK & Ireland LFL revenue up 3%. The latter figure is perhaps stronger than many investors had expected. With consumer confidence being low, delivering growth in sales in what are non-essential items could be seen as a major success.
There was growth outside of the UK, with LFL revenue in the Nordics and Greece rising by 11% and 23% respectively. The company is on target to meet expectations for the full year and with market share gains across the business, its overall performance appears to be sound.
Looking ahead, Dixons Carphone is expected to report a fall in its bottom line of 26% in the current year. While disappointing, a decline in its bottom line is not due to last long, with growth of 3% expected next year. With a price-to-earnings (P/E) ratio of under 8, it seems to offer a wide margin of safety. Alongside the appointment of a new CEO, this could suggest that the stock has significant turnaround potential.
Also offering the prospect of a successful turnaround is defence specialist BAE (LSE: BA). The company’s share price has disappointed in recent months, with it falling by 13% since June 2017. It now trades on a P/E ratio of 13.4, which suggests that it could be undervalued given its future growth prospects.
With BAE expected to report a rise in earnings of 3% this year and 6% next year, its outlook is relatively upbeat. However, over the medium term it could begin to generate improved financial performance, with increased spending on the military set to be ahead. For example, in the US there is expected to be a significant increase in defence spending under Donald Trump. He is seeking to improve the capabilities of the US military, while also stimulating economic growth. As such, BAE could be a major beneficiary.
Certainly, it has been a difficult period for investors in the stock. An era of austerity caused demand for its products to decline. But with a brighter future likely to be ahead, now could be the right time to buy it for the long term.
Peter Stephens owns shares in BAE. 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.