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Why has the Morrisons share price underperformed the FTSE 100?

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Over the last five years, Morrisons (LSE: MRW) share price has fallen by 5%, while the FTSE 100 has gained 25%. That’s clearly a disappointing result for the company and provides an insight into the challenging trading conditions which the stock and its sector peers have experienced.

Looking ahead though, there could be scope for a successful recovery. As a result, now could be a good time to buy the stock alongside another potential turnaround play.

Challenging trading conditions

The last five years have been exceptionally difficult for UK retail shares. Consumer confidence has come under intense pressure at times, with it generally being negative during the period. The industry has also seen a continued switch away from traditional forms of retailing, with consumers preferring to shop online and in convenience stores. Companies that have been unable to innovate and adapt their business models have generally performed poorly versus their nimbler peers.

Morrisons has also been negatively impacted by increasing competition within the retail sector. The growth of budget retailers such as Aldi and Lidl has caused shoppers to leave major supermarkets, with their increasingly price-conscious outlook at least partly caused by inflation being above wage growth. And with Brexit causing the prospects for the UK economy to worsen, stocks operating mostly in the UK have been hit hard.

Turnaround potential

Now though, Morrisons seems to be on the road to recovery. It’s being helped to some degree by a fall in inflation in recent months, with consumer disposable incomes being under less pressure than they were last year, in real terms. However, it’s also put in place what seems to be a solid strategy that focuses on ramping-up its growth prospects, while improving its balance sheet strength.

For example, the company has expanded online through a deal with Amazon, while an agreement with McColl’s means that the company now has its products in a wide range of convenience stores. Such agreements do not eat up large amounts of capital and yet provide the company with access to growth areas which are much stronger than the traditional supermarket space.

With its bottom line due to rise by 8-9% per annum over the next two years, its shares could generate stronger performance than the FTSE 100 over the medium term.

Improving outlook

Also offering turnaround potential after a difficult period is industrial, energy and property services company Hargreaves Services (LSE: HSP). It reported an encouraging pre-close trading update on Friday which showed its performance during the year has been satisfactory. It expects to report results that are in line with expectations and has made further progress with its disposal programme.

Looking ahead, Hargreaves Services is forecast to post a rise in earnings of 40% in the 2019 financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of 0.4, which suggests they could offer good value for money.

Clearly, Hargreaves Services has endured a challenging period in its recent past. However, with it seeking to restructure its operations and improve its financial standing, it could be worth a closer look for less risk averse investors. A dividend yield of 2.6% is anticipated this year by the market, with an improving income outlook having the potential to boost investor sentiment in the stock – especially since dividends are due to be covered 2.5 times by profit this year.

Capital Gains

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Peter Stephens owns shares of Morrisons. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended McColl's Retail. 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.