The brothers have spent their lives working in people-driven sectors like Law. These sectors often get a bad rap from investors because any competitive advantage is tied to the members of staff, who can easily defect to a rival, become demotivated, or retire.

The Landers love these businesses precisely because everyone else hates them. Typically, Volvere is approached by banks or the management teams of struggling businesses, placing it in a strong negotiating position.

The sheer number of businesses on offer allows management to be choosy, typically only indulging in one or two deals a year. By buying distressed businesses and fixing them up, the company has compounded book value at 14.4% p.a since 2002 for a total increase of 513%.

How? The process goes a little like this. The Landers identify a single-digit P/E company, which is often penniless or nearly so, pays down debts, injects cash, incentivises staff, then hopefully reaps the rewards of a successful turnaround.

Right now, Volvere is valued pretty much at book value, which means the market is placing no value on the Landers’ proven ability to create shareholder value. This looks too cheap to me, so the shares could be worth a second look.

Judges Scientific

Like Volvere, Judges Scientific (LSE: JDG) makes its living acquiring whole businesses. Unlike Volvere, the company invests for the very long term, aiming to grow assets organically after acquisition.

As the name implies, the company specialises in scientific testing and measurement equipment and is very choosy in acquiring the very best firms in this category. Since 2003, it has transformed from a £4m investment vehicle to a £111.5m business.

The company has struggled in recent years due to low levels of governmental research spend and lumpy orders, but I believe now could be a good time to invest. The company managed to acquire three companies last year, for mid single-digit P/Es. As long as these companies continue to perform adequately, that’s a bargain price. If they excel, Judges may look very underpriced in hindsight.

Deep value vs debt

Gulf Marine Services (LSE: GMS) operates a fleet of “self-propelled, self-elevating accommodation jackup barges,” which are essentially offshore oil maintenance ships with on-board accommodation quarters that allow a team to live and work on a rig easily.

With customers like Shell, Total and Saudi Aramco, clearly Gulf Marine Services is doing something right. The maintenance and engineering services provided by GMS are necessary come rain or shine, so a certain amount of business is guaranteed, but the combination of the oil price crash and a reduction in capex by oil majors has hurt it.

The shares have fallen nearly 50% since January 2015 as aggressive expansion plan suddenly became underfunded. Debt has ballooned to near-crisis levels.

While the company’s fleet expansion was costly, the ships are highly profitable once operational. The company makes 50% operating margins, indicating cashflow could increase drastically, maybe even double, once this flurry of investment ceases.

I believe the company could easily re-rate 20%-30% higher if business continues to be smooth.

The post I’d buy these 3 despised stocks for turnaround profits appeared first on The Motley Fool UK.

Take a look at the value created by Miller and co between 2003 and 2015;

• 22% average annual return on investment since its first deal in 2005.
• Turned a net shareholder investment of £0.1bn into £2.9bn between October 2003 and 2015.

The Melrose method

Melrose tends to seek out companies that manufacture niche items with repeat demand, such as filters, that will inevitably have to be replaced. These replacement cycles provide the company with some level of revenue visibility. Melrose prefers a strong competitive position within an industry.

Once it has identified and purchased a company, it focuses on improving cash flow through a combination of job cuts, incentive structures, operational tweaks and investment, before hopefully selling for a profit.

For a while Melrose looked cheap, but the successful sale of Elster for £3.3bn to Honeywell woke the market to its potential. Melrose had acquired the company for only £1.8bn back in August 2012.

It doesn’t do things by halves, more often than not buying entire businesses and working on them for a number of years to turn a profit. This approach has yielded fruit so far, but the sheer size of the transactions means Melrose will likely only be as good as its last deal.

With that in mind, lets take a quick look at its most recently acquired improvement project, Nortek. Last year, 73% of its operating profit was sucked out of the company by interest payments. In one fell swoop, Melrose bought it, cleared its debt and has presumably since got to work improving the underlying business.

It’s an interesting situation, so I’d advise you heavily research Melrose’s other business, Brush, before considering an investment. With that in mind, I believe £22m market cap Volvere plc (LSE: VLE) could be a worthwhile alternative pick.

To roll, to turn about

The company’s name is Latin for ‘to roll, turn about, turn round’ and like Melrose, Volvere specialises in buying ailing businesses, improving them and selling at a profit.

Headed by brothers Jonathon and Nicholas Lander, a Cambridge-educated lawyer and a chartered accountant respectively, Volvere shies away from the industrial companies Melrose chases and instead focuses its efforts on ‘people businesses’.

It does this for two reasons;

1. No one else wants to buy struggling human capital. This creates value opportunities for Volvere.
2. The brothers have spent their own careers working in people-based businesses and it’s what they’re good at.

It’s an interesting approach, and one that goes against my natural Foolish instincts. After all, an individual can leave, taking key clients or know-how with them. But through an unbroken spell of turnarounds, the company has compounded book value at 14.4% per year since 2002 for a total increase of 513%. And the share price has appreciated at a CAGR of 13% over this period, resulting in a 309% rise.

Right now, the company is working on three turnarounds and the market seems to be placing little faith in its track record as it trades at a slight discount to book value.

So I’d encourage readers to conduct thorough research on Melrose or Volvere before taking the plunge as there are a lot of moving parts to consider.

The post Melrose Industries plc has delivered 22% annually for investors. Can Volvere plc do the same? appeared first on The Motley Fool UK.