Buying shares in companies that are experiencing difficulties is always a risky move. Ultimately, it is never possible to say with certainty that a recovery will occur. This means that the risk of loss is in place, and could be much higher than for a stock that offers a more robust near-term outlook.
However, the reward potential of turnaround stocks may also be relatively high. Investor sentiment towards them is often weak, and this may mean that there is relatively high upside potential on offer over the long term.
With that in mind, here are two FTSE 250 shares which are currently experiencing difficulties. In the coming years, though, they could deliver significant total returns.
The performance of outsourcing specialist Capita (LSE: CPI) has been hugely disappointing in recent periods. The company has experienced a challenging set of market conditions, with there being significant uncertainty regarding the future prospects for the outsourcing industry. This is expected to contribute to a fall in its bottom line of 43% in the current year, followed by a further decline of 5% in the next financial year.
Clearly, such a significant fall in earnings is likely to hurt investor sentiment. Indeed, it appears as though the market has little confidence in the prospect for a successful turnaround. The stock trades on a price-to-earnings (P/E) ratio of 7 using next year’s forecast earnings figure. This suggests that more falls in profit are being priced-in by investors.
However, Capita is making changes to its business model. It recently launched a rights issue, which could provide it with the capital it requires to reinvest for future growth. And with a rationalisation of its asset base, as well as a refreshed management team, it has the potential to deliver a successful comeback in the long run.
Also offering the potential for a successful turnaround is greetings card retailer Card Factory (LSE: CARD). The company is experiencing a challenging period at the present time, with consumer confidence being at a relatively low ebb. This is contributing to a declining bottom line, with its net profit expected to drop by 1% in the current year after last year’s decline of 5%.
Despite this, the company is due to report a turnaround in the next financial year. It is expected to deliver a rise in earnings of 5%, which could catalyse investor sentiment. And with inflation now being behind wage growth, it would be unsurprising if consumer confidence improved to at least some degree. This could cause the company’s sales and profitability to improve at a faster rate than the market is currently anticipating.
With Card Factory having a dividend yield of over 6% at the present time, it appears to offer good value for money as well as a high level of income return. As such, it could prove to be a worthwhile recovery share that may post impressive total returns.
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Peter Stephens owns shares of Card Factory. 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.