As the age-old saying goes, “the time to buy is when there’s blood in the streets”, and many of the world’s best investors have made a name for themselves following this strategy.
But you need to be careful where you invest. Buying any old company just because it has fallen out of favour with the wider market is likely to cost more money than you stand to make.
With that in mind, here are three turnaround plays that have strong balance sheets, wealthy backers and a concrete plan to instigate a turnaround.
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Slashing costs
Standard Chartered (LSE: STAN) is a bank in trouble, but the bank has recently started to wake up to the fact that it needs to change. The group is now looking to strip out costs of $400m per annum, sell businesses that no longer fit the bank’s strategic vision and divest businesses that require a higher level of regulatory oversight.
On top of these business ‘adjustments’, the bank is slashing up to 4,000 jobs and closing loss-making businesses. There is also talk of a complete management overhaul, so it’s quite clear that Standard is serious about restructuring.
What’s more, the bank has some wealthy backers in the form of Tweedy, Browne Partners — one of the world’s oldest and most respected fund managers — and Aberdeen Asset Management, both of which own large chunks of Standard’s equity.
Then there’s the bank’s rock-bottom valuation to consider. Indeed, at present levels, Standard is trading at a forward P/E of only 9.1, its lowest valuation in a decade! The City expects the bank to report earnings per share of 120.1p for 2016, which means the bank is currently trading at a 2016 P/E of 7.9.
Overall, Standard is cheap; the bank is making drastic changes and wealthy backers are willing to support the turnaround.
Cash rich
The best turnaround opportunities are the companies with strong balance sheets. A cash-rich balance sheet gives management time to execute a turnaround strategy, significantly improving the company’s chances of returning to growth.
Two such companies are Flybe (LSE: FLYB) and Boohoo.Com (LSE: BOO).
Since the beginning of this year, Boohoo’s shares have fallen in value by 40% as the company has failed to live up to the City’s lofty growth expectations. However, with around £60m in cash on the balance sheet — round 5.3p per share — Boohoo isn’t going anywhere any time soon and there’s downside support if things go catastrophically wrong.
Additionally, the company’s earnings are expected to expand 40% during 2016, which gives a PEG ratio of 0.7. Boohoo is trading at a 2016 forward P/E of 23.1, which is high but, as the PEG ratio indicates, undervalues the company’s growth potential.
Similarly, Flybe has also failed to live up to expectations over the past 12 months. The company is in the process of a turnaround but it’s taking longer than expected to return to growth. Additionally, a number of unwanted plans are costing the group £26m per annum. Management is trying to offload these planes but once again, it’s taking longer than expected.
Still, Flybe is currently trading below its tangible net asset value of around 78p per share and the company has a net cash balance of approximately £50m.
Nevertheless, it is going to take a year or two for Flybe to return to growth and there’s plenty that could go wrong over this period. So the company is a high-risk bet.
