One turnaround stock I'd sell to buy Premier Oil plc

Some rules are meant for breaking. While conventional investing wisdom says "it's time in the market that counts, not timing the market", in my experience this doesn't always hold true for turnaround stocks.

If things are going wrong, then buying too soon can be costly. Similarly, when a turnaround starts to deliver results, shares can often climb very rapidly indeed. It can make sense to sell before the market loses interest.

One I'd buy

Today I'm looking at two companies which I believe are at opposite ends of the turnaround spectrum.

I expect £370m oil and gas producer Premier Oil (LSE: PMO) is likely to deliver very strong profit growth over the next couple of years. Stronger cash flow and higher oil prices should also help the group to reduce its debt mountain.

Although net debt is still high at $2.8bn, plans are in place for cutting this burden. Management expects to report a reduction by the end of the year, helped by more than $200m of receipts from recent asset sales.

An 80% profit?

The oil firm's stock currently trades at a discount of roughly 40% to its book value, which was last reported at $869m. This discount reflects the lofty level of debt carried by the group. Before agreeing to a refinancing deal and before oil prices started to rise, this was a risky situation for shareholders.

I think these risks may now have become an opportunity. As the debt levels fall, I'd expect Premier's market capitalisation to rise towards its book value, which is around 130p per share. That's around 80% above the current price.

This won't happen overnight, but I think it could arrive quicker than expected if the price of Brent Crude holds above $60 in 2018. I believe now could be the right time to buy into this turnaround story.

Time to take profits?

By contrast, I'm starting to think that it might be time for investors in Balfour Beatty (LSE: BBY) to consider selling.

The group's turnaround in the hands of chief executive Leo Quinn has been successful. The shares have climbed 80% from their 2014 lows of around 150p. But I'm starting to question how much more is left in the tank.

In Balfour's latest trading update, Quinn confirmed his belief that the group will achieve "industry-standard margins in the second half of 2018". Analysts' forecasts for next year suggest to me that this would mean an overall operating margin of about 2%, perhaps slightly higher if support services work picks up.

Companies with very low margins and high costs can be risky because, as we've seen with Balfour and several rivals, it only takes a relatively small problem to result in a big hit to profits.

By bidding more carefully for new work Balfour is hoping to avoid further such problems. But this is limiting growth -- the £11.4bn order book is expected to be unchanged from June at the end of the year, and around 8% lower than at the end of 2016.

In my view, the firm's recovery is probably already in its share price. Balfour trades on a 2018 forecast P/E of 14, with a prospective dividend yield of 2.2% for next year. I would consider taking some profits.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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