These 2 battered stocks look set for a return to growth

These two hot recovery prospects certainly carry some risk, but they could provide great rewards for brave investors.

| 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.

Airplane sitting on a runway

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.

My first pick for today is aero engineer  Cobham (LSE: COB), which looks like it’s finally emerging from a truly dire spell. Its shares had slumped after four straight years of falling earnings, but so far today we’ve seen a 5.5% gain on the back of first-half results, to 141.5p.

There’s a 23% fall in earnings forecast for this year before a predicted return to growth in 2018, and a drop in first-half adjusted EPS from 3.8p to 2.5p reiterated the likelihood of that, especially with adjusted operating profit down 12% to £89.9m.

But that’s pretty much in line with expectations, as chief executive David Lockwood pointed out that the company is “in the early stages of its turnaround and there remains a wide range of potential outcomes for 2017.

Cash turnaround

Cash had been tight, and a rights issue in May raised £479m. Add to that a cash conversion ratio of 120% in the half, which saw free cash flow rise by 20% to £64.6m, and we’re looking at a net debt-to-EBIDTA multiple dropping from 2.3 times a year ago to a much more manageable 1.5 times.

As expected, there is to be no dividend this year, and there will be none paid until “it is prudent to do so.” That’s exactly the right approach just now, when efficiency, savings and cash retention are of utmost importance.

After a year in which Cobham shocked investors with massive writedowns (including a £150m impairment over its flight refuelling contract with the US Air Force), I really do think we’re finally seeing light at the end of the tunnel.

There’s still some significant risk, certainly, but I reckon Cobham’s recovery prospects outweigh it — and I’d buy.

Cheap pharma

Another bombed-out stock that has crossed my radar is Hikma Pharmaceuticals (LSE: HIK), whose earnings dropped in the past two years and whose share price has crashed by 47% in the past 12 months, to 1,409p.

The company got a big knock-back from the US Food and Drug Administration, which declined to approve its generic asthma treatment, VR315, intended as competition for GlaxoSmithKline‘s Advair Diskus.

VR315 has not actually been rejected, and there’s still a chance for it. But the harsh reaction to the FDA’s response is not surprising, as VR315 could be very lucrative for Hikma (and for Vectura, from whom Hikma licenses the powder formulation it uses).

Attractive prospects

But even without VR315, Hikma has an impressive array of treatments in its arsenal (the firm sells more than 700 products worldwide) and, I think, a very promising future. And I do think the share sell-off has been overdone.

There’s now an 8% drop in EPS forecast for the current year, but a 24% upturn suggested for 2018 would drop the P/E to under 14. Dividends look set to yield under 2% this year and next, but they’re nicely progressive and very well covered by projected earnings — if 2018 predictions come off, we’d be looking at cover of four times.

And we shouldn’t write off that VR315, as a new amended application for FDA approval will be in the pipeline — though it will probably take around 12 months. But we should see that as a bonus — even as it stands now, Hikma looks like a buy to me.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

More on Investing Articles

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »

Investing Articles

As like-for-like sales continue to fall, is the B&M European Value Retail SA (LSE:BME) share price a bargain?

B&M European Value Retail is known for its low prices, but could growing like-for-like sales make the share price the…

Read more »

Illustration of flames over a black background
Investing Articles

After rocketing 232% in a year can this red-hot FTSE 250 stock keep going gangbusters?

Harvey Jones says this FTSE 250 stock's on fire after smashing the index over the last year. It's cheaper than…

Read more »

Investing Articles

The Burberry share price has jumped 15% this morning! Time to pile in?

Harvey Jones was thrilled to wake up this morning and find the Burberry share price flying, but he's still sitting…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

At a bargain-basement price now, is it time for me to buy this 8%-yielding FTSE 250 media stock?

Shares in this FTSE 250 broadcasting firm continued their recent decline after the latest results release, leaving them looking an…

Read more »

Investing For Beginners

Here’s what a landmark legal ruling could mean for the Lloyds share price

Jon Smith mulls over whether issues with historical motor finance commissions could spell trouble for the Lloyds share price into…

Read more »