2 top turnaround stocks that could make you rich

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turnaround

While most stocks battered by Brexit have bounced back, shares of challenger bank Virgin Money (LSE: VM) are still trading at a hefty pre-vote discount due to investors' fears over the state of the domestic economy.

But for those who reckon the economy is on steady ground, I reckon Virgin could be a great turnaround stock as it continues to grow profitably and its shares trade at only 0.7 times their book value, suggesting plenty of room for upward share price movement if investor sentiment turns positive again.

The company's health was on full display in H1 results. Underlying pre-tax profits rose to £128.6m from £101.8m the year before as it brought in more retail deposits and promptly turned them into profitable mortgages and new credit card advances. The loans the company has been extending appear to be quite safe, as well as mortgages in arrears of three months or more at just 0.15%, below the industry average of 0.91%. Likewise, credit card arrears were a fraction of the industry average.

On top of making solid loans, the company's management team is making good progress in cutting costs. Its cost-to-income ratio in H1 fell from 58.8% to 53.9% year-on-year (y/y), which helped boost return on equity (RoE) to an industry-beating 13.35 even as net interest margin remained low due to rock-bottom interest rates.

Unlike larger rivals, Virgin Money is also unencumbered by legacy bad assets or regulatory fines. This means as the company ramps up profitability it can afford to actually pay dividends. The company's interim dividend was 1.9p and analysts are expecting a full-year payout of 5.84p against 36.79p in earnings per share. With a strong tier one capital ratio of 13.8% the bank's balance sheet will allow for an ever greater portion of rising earnings to be paid out in dividends in the years to come.

Investors who reckon recent housing price weakness and tepid consumer confidence are only temporary may find a highly-discounted Virgin Money a great contrarian option today.

Slimming down to grow

A riskier turnaround option I've been eying up is Molins (LSE: MLIN), which produces packing machinery and equipment for the consumer goods and healthcare industries. The company has suffered from three straight years of falling earnings but its new management team has an ambitious plan to turn things around.

The first step was selling its tobacco packaging business for £30m. This will allow it to focus on the faster growing parts of its business that recorded £25m in revenue in the half year to June. The proceeds from the sale will go towards acquisitions and organic expansion that will allow it to cement its global footprint and land larger contracts with multi-national and local customers.

With the sale only completed on August 1, it's still very early days, but initial signs of a turnaround are promising. In H1, underlying earnings per share were 3.1p, a vast improvement on the 4.2p loss recorded in the year prior. And with net debt down to just £1.1m even before the proceeds of the sale, the company will have plenty of financial flexibility to pursue deal-making. There's still a lot of work to be done, but I'll be keeping a close eye on Molins in the quarters to come.

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Ian Pierce 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.