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Could Kier and Thomas Cook shares be bargains of the year?

There seems to be an abundance of companies in turnaround mode on the market at the moment. In an article yesterday, I wrote about two I believe have good potential to deliver high rewards for investors.

Today, I’ll discuss the prospects for Kier  (LSE: KIE) and Thomas Cook  (LSE: TCG) and give my opinion on whether they’re now bargain picks, or stocks to avoid at all costs.

Kier-illion?

Kier’s shares were trading at over 1,000p little more than a year ago, but have recently hit lows of not much above 100p. A rights issue (at 409p) just over six months ago was supposed to strengthen the company’s balance sheet to the extent it would report net cash at its financial year-end of 30 June. But that won’t now be the case.

Group trading has been below expectations, and management says it will report net debt at 30 June, and average month-end net debt over the year of between £420m and £450m. As a result, new chief executive Andrew Davies pulled forward the conclusions of a strategic review that had been scheduled for announcement on 31 July.

The company now plans to dispose of (in what will effectively be a fire sale) an array of non-core assets. It said it expects a “material reduction” in “overall indebtedness” during the next 12 months, but gave no real guidance on when debt will be under control.

Despite the shares being “cheaper” than ever, short selling of the stock — sophisticated hedge funds positioning themselves to profit from a falling share price — has only increased in recent days.

I think Kier’s future, possibly even its survival (recall the collapse of sector peer Carillion), is so uncertain that the downside risk for investors today is simply too big. It’s a stock to avoid in my book.

Thomas Cooked?

Thomas Cook is another company where debt is dangerously high (£1,247m at the 31 March half-year-end) — and moving the wrong way. In an article on 30 May, I suggested cashing out of the shares at 18p might be a wise move. Has news in June — and a decline in the share price to 14.5p — changed my view?

On 10 June, the company announced it was in discussions about a potential offer for its tour operator business, following receipt of a preliminary approach from Fosun International. This added to a number of previous expressions of interest in various parts of Cook’s business.

However, having talked of maximising value for “shareholders” in previous instances, Cook’s latest announcement referred to “maximising value for all its stakeholders.” (My bold.) Stakeholders include debt holders, and the change of terminology is ominous, because we invariably find it in cases of major capital restructuring, such as a debt-for-equity swap, that leave shareholders with little or no value.

Also ominous was a recent report that one of Cook’s bank lenders is trying to offload the unsecured element of its loan at just 50p in the pound. Meanwhile, the company’s bonds continue to trade at less than 40p in the pound, and short positions in the shares continue to rise.

I think this all adds up to a grim outlook for shareholders (who rank below debt holders) on any break-up or restructuring of the group. I’ll continue to avoid the stock.

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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.