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Could the Saga share price be the bargain of the year?

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The Saga (LSE: SAGA) share price has been hitting new lows this year, as investors have deserted the over-50s financial services and travel group in droves. There’s been a similar exodus at online retailer of musical instruments and music equipment Gear4music (LSE: G4M).

Here, I’ll discuss their turnaround prospects and give my view on whether they’re now bargains of the year, or stocks to avoid like the plague.

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Back to heritage

Floated on the stock market at 185p in 2014, Saga has slumped over the last 18 months to little more than 33p (market-cap £370m). It was formally demoted from the mid-cap FTSE 250 index to the FTSE SmallCap index yesterday.

The key to Saga’s future success rests on overcoming the challenges it faces from the commoditisation of the markets in which it operates, especially in insurance. Outgoing chief executive Lance Batchelor set out a fundamental change to the group’s strategy earlier this year: “To return the whole business to its heritage as an organisation that offers differentiated products and services.”

I think this is the right approach. It is, of course, early days. But there were encouraging signs of progress in the company’s trading update at last week’s AGM, where management also confirmed the company was trading “broadly in line with expectations.” 

City consensus forecasts put the stock on a price-to-earnings ratio of just 4.4 with a prospective dividend yield of 11.4%. This looks good value to me for a potentially high-reward turnaround proposition.

And because the stock is so cheap, I also see potential for a bid from private equity or for activist investors to come in and push for a break-up of the group. I think this may limit further downside for the shares. As such, I’m inclined to rate Saga a ‘buy’ at the current level.

Missed a beat

Gear4music floated on AIM at 139p in 2015 and reached a high of over 850p in autumn 2017. The shares had already retreated to nearer 500p, before plunging 50% on a profit warning in January this year. Annual results this morning saw the price fall as much as 16%. But it’s since regained some ground, trading 8% down on the day at 212.5p (market-cap £45m), as I’m writing.

Gear4music hasn’t had the fundamental identity crisis suffered by Saga. Instead, what we’ve seen is something rather common with young, fast-growing companies. An excited market pushing the valuation of the stock up to a grossly over-exuberant level, followed by a crash when the company stumbles operationally due to its galloping growth.

In today’s results, the company said it’s confident the actions it’s taking will address the operational issues that impacted profitability last year. These issues included insufficient capacity at its York distribution centre over the peak Christmas trading period, resulting in margin-sapping, higher-than-anticipated labour and distribution costs.

While the company also noted today a “challenging retail environment,” and that “the on-going Brexit uncertainty and its impact on consumer confidence is unhelpful,” the question for investors is whether the market has overdone it in hammering down the company’s shares to the extent it has.

A valuation of less than 0.3 times forecast sales suggests so to me, and I rate the stock a ‘buy’.

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G A Chester 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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