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Why IQE plc isn’t the only turnaround stock I’d buy after 20% share price drop

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In the last three months, the share price of advanced semiconductor wafer products specialist IQE (LSE: IQE) has declined by around 20%. This follows a period of significant gains which saw its valuation rise by as much as 330% in the previous 12 months.

Part of the reason for its disappointing performance of late could be profit-taking. This would be unsurprising given that many of its investors will be sitting on large profits. However, there has also been a degree of uncertainty regarding its financial performance that has culminated in a negative research note being published about the company. Here’s why the stock could still deliver high returns.

Disputed prospects

On Monday, IQE responded to the negative research note that was released on Friday by ShadowFall Capital & Research. The company stated in its update that the allegations contained within the report are without merit. It went on to state that it also creates a misleading analysis of its financial position, and that it holds itself to the highest standards of corporate governance, transparency and integrity.

The update released by the company goes into detail regarding areas such as its asset valuation, joint ventures and free cash flow generation. Overall, the business continues to anticipate that revenue for 2017 will not be below £150m. It also remains confident in its outlook for 2018 and beyond.

Uncertain period

Of course, disputes regarding accounting practices and the health of a company’s business model can cause share prices to become volatile. This may prove to be the case for IQE in the short term. However, in the long run the company appears to have investment appeal. In the 2018 financial year it is due to record a rise in its bottom line of 28%. This is expected to be followed by growth of 40% in the next year.

Since the stock trades on a price-to-earnings growth (PEG) ratio of 0.4, it seems to offer good value for money at the present time. This suggests that while potentially volatile, its share price performance could improve in the medium term.

Turnaround potential

Also offering turnaround potential after a challenging period is energy storage solutions company RedT Energy (LSE: RED). It reported a positive 2017 trading update on Monday which showed that orders for its units have increased by 269% since its interim results. Furthermore, there has been an increase in final stage customer selection of 11% during the same time period.

Looking ahead, the company is set to continue its focus on market penetration within its core segments. It will aim to accelerate volume orders for delivery and close large projects for delivery in 2019.

With losses due to narrow from £6.5m in 2017 to £1.9m in 2019, the outlook for the company appears to be positive. Investor sentiment could improve if RedT Energy is able to deliver stronger financial performance, and this may help it to recover following its 25% share price fall in the last three months. As such, it could be worth a closer look for less risk-averse investors.

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Peter Stephens has no position in any shares mentioned. 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.