Why I'll avoid this turnaround stock and buy BT Group plc

In my experience, one of the secrets to maximising your profits from turnaround stocks is to sell at the right time. Today I'm going to look at two turnaround situations, and ask whether it's time to buy or sell.

Building a solid result

Shares of construction group Balfour Beatty (LSE: BBY) climbed nearly 5% when markets opened this morning after the firm reported a solid set of half-year results.

Underlying pre-tax profit from £13m last year, to £22m during the first half of this year. Revenue rose by 5.6% to £4,201m, but the company's order book has fallen from £12.4bn at the end of 2016 to £11.4bn at the end of June. This was due to "much improved bidding disciplines". In other words, the firm is now only bidding for work that will deliver an acceptable profit.

Spare cash

Balfour's financial performance certainly has improved. Net cash at the end of the first half was £161m. Average net cash during the period -- a more useful measure -- was £45m. This was achieved without any major disposals, which suggests the business is now generating sustainable positive cash flow.

To celebrate this achievement, the interim dividend has been increased by 33% to 1.2p per share. Chief executive Leo Quinn expects the company's profit construction work to reach "industry-standard margins" during the second half of 2018.

I believe analysts have already priced-in much of this guidance to their forecasts. These suggest the group's full-year underlying profit will reach £76.5m in 2017 and £125.8m in 2018. That puts the stock on a forecast P/E of 22 for the current year, falling to a P/E of 13.5 next year.

I'd say that Balfour shares are now priced for a return to business as usual. So for turnaround investors, it might be time to consider taking some profits.

I've changed my mind

When BT Group (LSE: BT-A) issued a profit warning and revealed a major accounting scandal earlier this year, I was pretty bearish on the stock. I also thought that chief executive Gavin Patterson's plan to maintain dividend growth at 10% per year was likely to end badly.

I still have concerns about the dividend, but my general view on BT shares has become more positive, for several reasons. The first is that BT shares have fallen further. At under 300p, they trade on just 10 times earnings, while the group's forecast dividend yield has risen to 5.4%. That's high enough to be attractive, but not so high that it suggests the market is pricing-in a cut.

Another factor behind my more bullish view is the appointment of incoming chairman Jan du Plessis. Mr du Plessis has a track record of creating value for shareholders at companies including SAB Miller, British American Tobacco and Rio Tinto. I'm confident he can get to grips with BT's problems.

My final reason is that the telecom giant's trading performance and cash flow have remained stronger than I expected. BT's first-quarter results showed profits broadly flat, with free cash flow up and net debt down. That's an appealing combination, especially as recent news suggests to me that BT will maintain its near-monopoly status as the UK's main broadband infrastructure operator.

While risks remain, I'd argue that BT may be worth considering as a contrarian buy.

Will you retire early?

Investing in turnaround stocks can be a great way to beat the wider market. But to build wealth successfully, I believe a clear strategy is required.

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Roland Head owns shares of Rio Tinto. 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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