Buying shares in companies that have failed to meet expectations in the recent past can be a risky move. It can take time for them to recover and, in some cases, they may fail to reach their previous share price highs.
However, turnaround shares can also offer high rewards. If they’re able to put in place a revised strategy which resonates with the stock market and leads to improving financial performance, wide margins of safety at purchase can lead to high returns further down the line. With that in mind, here are two stocks with recovery potential that could help to boost your portfolio returns.
Reporting on Thursday was housebuilder Bovis (LSE: BVS). The company’s performance in the first half of the year has been encouraging, with 1,580 completions slightly ahead of its expectations, and 4% up on the same period last year. It has experienced robust trading conditions with good demand for homes across all of its regions and firm underlying pricing. It continues to expect to record a 23.5% gross margin and a 25% return on capital employed over the medium term.
The company’s Home Builders Federation (HBF) customer satisfaction score is trending at well above 80%, which would indicate a 4-star rating. This would represent a strong turnaround for the business after the disappointing customer satisfaction levels of recent years. They led to compensation payments, which hurt the company’s financial performance and investor sentiment.
Looking ahead, Bovis is forecast to post a rise in earnings of 40% in the current year, followed by further growth of 15% next year. With a price-to-earnings growth (PEG) ratio of 0.8 and a dividend yield approaching 9%, it seems to offer significant total return potential.
Also offering recovery potential over the medium term is specialist lender Provident Financial (LSE: PFG). It has faced a hugely challenging couple of years, with a change in strategy causing severe disruption to its consumer lending division. Customer satisfaction declined and the company’s financial prospects were downgraded.
Now though, a refreshed strategy and a change in personnel seems to be creating a brighter future for the business. It’s expected to record a rise in earnings of 13% in the current year, followed by further growth of 30% next year. This puts it on a PEG ratio of 0.3 and suggests that it offers a wide margin of safety at a time when the FTSE 250 is trading at relatively high levels.
Certainly, risks remain to Provident Financial’s future progress. Regulatory risk could hurt investor sentiment, as well as its financial prospects. But with what seems to be an improving business model and a low valuation, it could offer significant growth potential over a long-term time period. As such, now could be the perfect time to buy.
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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.