2 Turnaround Buys For 2016? BHP Billiton plc And Home Retail Group Plc

Roland Head asks if BHP Billiton plc (LON:BLT) and Home Retail Group Plc (LON:HOME) could hit the recovery trail and start climbing in 2016.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in BHP Billiton (LSE: BLT) and Home Retail Group (LSE: HOME) have both fallen by around 50% this year.

Investing in either stock after such big falls may seem risky, but good turnaround plays are often uncomfortable buys.

In this article I’ll take a look at the pros and cons of investing in each company, and ask whether now is the time to buy.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

BHP Billiton

BHP Billiton stock looks very cheap relative to its historic earnings. Even last year, when the mining downturn was already starting to bite, BHP managed underlying earnings of $1.20 per share. At today’s share price, this equates to a trailing P/E of just 9.

The problem is that earnings will be much lower this year, and probably next year too. However, commodity prices will eventually stabilise and start to rise. As this happens, BHP’s earnings will recover.

As investors, we need to decide how much BHP would need to earn to justify today’s share price. In my view, earnings of $1 per share would be enough as this would put the shares on a P/E of about 10 and support a dividend yield of perhaps 3.5%.

I think it’s likely that when the market for oil, copper and iron ore improves, BHPs earnings will rise to at least $1 per share, possibly much higher. On that basis, I think BHP is probably good value at around 700p, although further falls are still possible.

Home Retail Group

Home Retail Group owns Argos and the Homebase chain of DIY and homewares stores. Home also has its own finance business with assets valued at £589m and net cash of £193m. The finance assets are customer loans that could easily be sold and converted to cash if necessary.

Given that Home Retail’s market cap is currently only £745m, this means that the group is trading roughly in line with the value of its customer loan book and its net cash. Argos and Homebase are effectively being valued at zero.

Some of Home’s net cash will be used up this year in order to support the firm’s dividend and to fund Argos’s new same-day delivery service. However, Argos and Homebase generated a combined operating profit of more than £40m during the first half of the year, with combined sales of £2.6bn.

I think that two profitable retail businesses of this size should be worth a lot more than Home’s current valuation suggests.

It’s also worth noting that Home trades on just 9 times current year forecast earnings and offers a prospective dividend yield of 3.9%. This modest valuation and cash-backed income looks quite low-risk to me.

What if I’m wrong?

Of course, the reason Home and BHP have such depressed valuations is that they face a number of serious headwinds.

Commodity prices may continue to fall, depressing BHP’s earnings even further. If interest rates continue to rise, BHP could also face higher borrowing costs.

For Home Retail, the main challenges in my view revolve around the challenge of reinventing Argos as a successful digital retailer with a high street presence.

Management at BHP and Home Retail have a tough job ahead of them, but I don’t think it’s impossible. That’s why I own shares in both companies.

This AI stock is becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of BHP Billiton and Home Retail Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »