With the stock market trading near record highs, I expect many investors are holding off from making many new investments. However, not all shares have performed as strongly and in this article, I’m going to look at two beaten-down shares I believe may offer attractive turnaround potential.
Macroeconomic headwinds
Africa-focused insurer Old Mutual (LSE: OML) is the FTSE 100’s worst performer so far this month. Shares in the company have slumped 12% following the downgrade of South Africa’s long-term foreign currency credit rating by Standard and Poor’s to junk status last week.
The reason this has had such a huge impact on Old Mutual’s share price is due to the company’s outsized exposure to the country. Firstly, there is a currency impact, as the fall in the value of South Africa’s currency, the rand, reduces the sterling value of its profits earned there. Additionally, as the credit ratings of financial companies are linked to the country’s sovereign rating, this has had a knock-on effect on the credit rating of Old Mutual’s operations in the country, which would no doubt raise its funding costs and limit the company’s ability to grow.
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Looking forward, the risk of a further downgrade below investment grade is possible this year because of the constrained growth outlook and continued political uncertainty in the country. And investors have taken none-too-kindly to warnings that “political and economic uncertainty” could create hurdles going forward.
Regardless, return on capital is high and sales, profits and dividends are all expected to rise over the next two years. So while the macroeconomic backdrop doesn’t look too good, Old Mutual seems set to weather the current period of economic weakness due to its strong and growing retail franchises.
For 2017, City analysts expect adjusted EPS to grow 9% to 21.1p, giving its shares an enticingly low forward P/E rating of 9.3. And for the following year, adjusted EPS is forecast to increase by another 8%, which would reduce its forward P/E to just 8.6 times by 2018.
Dividend growth
Similarly, shares in asset manager and banking group Investec (LSE: INVP) have been hard hit by the credit rating downgrade.
Of course, macroeconomic conditions will present a challenging trading environment in the near term, but I expect the company’s financial performance to hold up more resiliently than previously expected. The company has a diversified business model, with its strengths in wealth management and private banking expected to drive steady earnings growth.
Its bottom line is expected to have risen by 9% in 2016/17 and is then due to increase by a further 16% in 2016. This gives it a P/E of 12.2 and a forward P/E of 10.5. And this leaves hopes of a dividend of 23p per share this year — up from 21p in 2015/6 — and giving Investec a market-beating prospective yield of 4.2%. Furthermore, with the projected dividend cover of nearly two times, I reckon there’s further scope for dividend growth in the future.
