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£1,000 to invest? Here’s one turnaround stock I’d buy today, and one I’m still avoiding

No company has a God-given right to be listed on the FTSE 100. You have to earn it, as fallen high-street hero Marks & Spencer Group (LSE: MKS) has found to its cost. It recently dropped out of the blue-chip index for the first time, after repeatedly failing to revive clothing sales.

On your Marks

When I checked the M&S share price this morning, I thought the comeback must finally be underway, with a 3% jump following publication of its half-year results. Closer inspection brought only disappointment. Profits before tax and adjusting items fell by a whopping 17.1% to £176.5m, due mostly to weak first-half sales in its Clothing & Home division.

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The results were nonetheless bullishly headlined “Far-reaching change – delivered at pace,” which suggests management at least is confident of a turnaround. As are investors, judging by the hop in the share price.

The food business is also on track, with positive like-for-like sales and strong volume growth,” while Clothing & Home sales picked up in October (a trend also seen Next, as colder October temperatures brought out the shoppers).

High dividend, low cost

Management completed its 50% acquisition of Ocado Retail, closed 17 full-line stores, and delivered cost savings totalling around £75m. It also strengthened the balance sheet, with £250m bond issue, rights issue, and dividend cut. The forecast yield still looks good at 5.9%, covered 1.7 times by earnings. Unsurprisingly, given that the share price has fallen by 35% in the last year alone, the valuation is low at 9.6 times forward earnings.

The future still looks tough: While some improvement in trading is planned in the second half, market conditions remain challenging,” today’s report said.

But I despair of Marks & Spencer clothing, which seems immune to overhaul. Online sales are disappointing, despite its ‘digital first’ strategy. Throw in Brexit, the global slowdown, and a forecast 23% drop in earnings per share in the year to 31 March 2020, and it isn’t hard to see why broker Peel Hunt recently downgraded the group to ‘sell’. I certainly wouldn’t buy it today, although others are. They must have expected much worse.

On the up

Let’s try and find something more upbeat for you. FTSE 100-listed defence company BAE Systems (LSE: BA) jumped 5% in September, as investors took heart following an earnings upgrade from City analysts. The BAE share price is now up 20% in the last six months as, unlike M&S, it manages to shrug off its recent share price slump.

Interim earnings, profits and revenues have all been rising, which should help chief executive Charles Woodburn towards his target of delivering consistent and strong operational performance for customers and shareholders.

Despite all these positives, the stock still trades at just 12.8 times forward earnings, which are expected to rise steadily, by around 6% or 7% over the next few years. The forecast 4% dividend yield is solidly covered twice and, although you can find higher payouts on the FTSE 100, they don’t always look as secure as the BAT Systems dividend currently does.

BAE Systems isn’t as cheap as it was earlier this year, but it still looks good value to me. I would definitely buy it ahead of Marks & Spencer.

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Harvey Jones 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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