2 small-cap ISA stocks that could double in 12 months

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Flybe airplane on a runway

Today I'm going to look at two ISA-friendly small-cap stocks with the potential to be stunning turnaround buys.

Both companies have problems at the moment. But both have new chief executives and are working hard to deliver a recovery.

A troubled flier

Regional airline Flybe Group (LSE: FLYB) specialises in short-haul flights using smaller planes. It operates domestic services in the UK and flights from regional UK airports to Europe.

On Wednesday morning, the group issued a profit warning. Flybe now expects to generate a small loss this year, instead of the forecast profit.

One problem is that the firm's aircraft are flying one-third empty at the moment, pushing up the cost per passenger. However, I think the real problem is that historical commitments are forcing Flybe to operate too many aircraft.

This could soon change

Flybe's fleet is expected to start shrinking later this year, as leases expire on older aircraft. If the airline can get rid of aircraft on unprofitable routes and focus on busier routes, then its profitability could improve rapidly.

In my view, the main risk for shareholders is that Flybe's turnaround will be weaker and slower than hoped for. The firm has disappointed investors several times before.

An added concern is that Wednesday's statement shows that the group has moved from having net cash of £62.2m one year ago to having a net debt of £75m today. Most of this increase in net debt is the result of aircraft purchases totalling £102m, but the figures suggest to me that Flybe is also operating at a loss, as it did during the first half of the year.

Although I believe that Flybe offers the potential for big gains, there is still a lot that could go wrong. I'm going to wait for the group's full-year results in June before reviewing the situation again.

Does this P/E of 3.6 demand action?

Outsourcing and construction group Interserve (LSE: IRV) ended last year by suspending its dividend. The group reported a pre-tax loss of £94.1m and incurred a £160m loss on the termination of its Energy From Waste business.

The firm's average net debt was £390m in 2016 and it's expected to reach £450m in 2017. Chief executive Adrian Ringrose has handed in his notice and will leave when his successor, Debbie White, starts work in September.

At the time of writing, Interserve trades on a 2017 forecast P/E of 3.6. This ultra-low P/E tells me that the market expects Interserve to deliver earnings per share substantially below current forecasts.

The most likely reason for this, in my view, is that Interserve will be forced to issue new shares in a rights issue, to help reduce its debt levels. Further contract losses are also possible.

We won't know more until Ms White starts work in September. But if she's able to deal with Interserve's problems quickly and effectively, the stock could be quite attractive.

Interserve has got confirmed and probable orders worth £7.6bn, which is roughly two years' annual revenue. Historically, the group has generated a profit margin of about 2%. If this can be resurrected, then the firm would look cheap at the current valuation.

Buying today is risky, in my view. But this special situation could pay off handsomely.

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Roland Head has no position in any 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.