One bargain stock and one growth opportunity I would buy today

These two stocks appear to offer strong investment potential.

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Buying shares in companies that have experienced difficult periods can be a risky move. After all, their valuations and share price performance can disappoint in the short run while they seek to change their prospects. And even in the long run, there is no guarantee that a new strategy will be successful.

However, such companies can offer high reward potential. As such, they can be worth buying in some cases. With that in mind, here are two companies that have experienced difficult periods, but which could generate high returns.

Stronger outlook

One company that has experienced a difficult period is Merlin Entertainments (LSE: MERL). The company reported full-year results on Thursday which showed that its performance has been disrupted by extreme weather conditions and a spate of terror attacks. They caused challenges for the trading performance of the business – especially during the summer season,

Despite tough trading conditions, the company was able to report growth in visitor numbers of 3.5% to push them to record levels. It also recorded revenue growth of 11.6%, which was driven by growth in like-for-like revenue, new business development and favourable foreign exchange movements.

EBITDA (earnings before interest, tax, depreciation and amortisation) was up 9.5% versus the previous year. And with strategic progress being made in terms of increasing the number of hotel rooms and attractions, the year was a relatively successful one for the business.

Looking ahead, Merlin is expected to report a rise in its bottom line of 4% in the current year, followed by further growth of 10% next year. Despite such a strong rate of growth, it trades on a price-to-earnings growth (PEG) ratio of just 1.4. This suggests that it could deliver upbeat share price performance in the long run.

Recovery potential

Also offering potential for improved performance in future is Burberry (LSE: BRBY). The company is currently undergoing a period of significant change as it seeks to improve its financial performance. Profitability is expected to fall by 3% this year, but the stock is due to return to bottom line growth in the next financial year.

As part of its new strategy, the company is seeking to sell more goods at a higher price point. And today it announced a new creative chief, Riccardo Tisci (ex-Givenchy), who is highly regarded and has worked with CEO Marco Gobbetti before. 

Burberry’s focus on the luxury segment means a period of heavy investment in its store estate, as well as some store closures. This is set to put additional strain on its free cash flow over the medium term, but could create a business which is able to generate improving sales and margins in the long run.

Clearly, Burberry is a strong brand with a loyal customer base. By focusing on what is essentially its core customers and core products, the company could deliver improving performance. With cost cuts also being delivered at the present time, the stock’s valuation could gain a boost over the coming years.

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.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. 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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