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85%-faller Mothercare isn’t the only turnaround stock I would buy today

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In the last year, Mothercare’s (LSE: MTC) share price has fallen by over 85%. The business has experienced an incredibly challenging period which has caused it to release profit warnings and disappointing financial figures. In the short term, further pressure on its valuation cannot be ruled out.

However in the long run, the retailer could now offer turnaround potential. It appears to have a wide margin of safety, with investors seemingly having priced in further disappointment for the mother and baby goods business. As such, it could be worth a closer look alongside another company which is expected to deliver improving levels of profitability over the medium term.

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Uncertain outlook

The key Christmas period was a relatively disappointing one for Mothercare. It was unable to deliver the performance which it and the market was expecting. A lack of discounting for most of the period seems to have been a key reason for its sub-standard performance, while discounting late in the season meant that gross margin was relatively weak.

This comes after a period where the company appeared to be putting in place an improved strategy. Now, though, its future prospects appear to be highly uncertain. This could mean that there are more challenges ahead for the business – especially since the outlook for UK consumers is downbeat due in part to inflation being above wage growth.

Improving outlook

Despite the problems it faces, Mothercare is expected to report a rise in its bottom line in the 2019 financial year. Its earnings are due to increase by 30%, and then by a further 81% in the 2020 financial year. Clearly, there is scope for these figures to change and the company may miss its guidance due to difficult trading conditions. However, the figures also serve to show that the company may be able to deliver a turnaround faster than the market is currently expecting.

With the stock having a price-to-earnings growth (PEG) ratio of 0.1, it seems to offer growth potential at a reasonable price. While at the riskier end of the investment spectrum and currently experiencing financial uncertainty, it could be worth a closer look for less risk averse investors.

Future potential

Also offering turnaround potential is oil and gas production company Gulf Keystone Petroleum (LSE: GKP). It released results for the 2017 financial year on Wednesday which showed a profit for the first time since its entry into Kurdistan. Its net profit of $14.1m shows that it’s moving in the right direction, with significant operational progress having been made in recent years.

In 2017, the company met its gross production target, delivering average production of 35,298 barrels of oil per day (bopd). It also remains confident of meeting its near-term target of 55,000 bopd as it invests more heavily into its Shaikan project.

Looking ahead, Gulf Keystone Petroleum is expected to report a rise in earnings of 194% in the current year, followed by additional growth of 82% next year. Since it trades on a PEG ratio of 0.1, it appears to offer a worthwhile risk/reward ratio for the long run.

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Peter Stephens has no position in any of the 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.

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