2 fast-growing turnaround stocks that could make you thousands

HSS Hire(LSE: HSS) and Speedy Hire(LSE: SDY) operate in the same industry, but their fortunes couldn't be more different. Both companies are in the midst of a turnaround although year-to-date, one group has performed significantly better than the other.

Gaining traction

YTD shares in Speedy have gained 5% while shares in HSS have lost 52%. The divergence is a result of the different speeds of the two companies' turnarounds. As Speedy has made progress, HSS has struggled. Indeed, updates published over the past few weeks sum up the situation well.

Today, in a brief trading update, Speedy said that group revenues for the period to 31 August, excluding disposals, are approximately 7.5% ahead of the prior year, primarily due to growth in services revenues. Meanwhile, net debt at the half year-end on September 30 is expected to be below £70m, down from £85m, while cost-saving efforts have shaved an estimated £3m from the annual cost base. These developments now mean that profit for the full year is expected to be "to be well ahead of the prior year and slightly ahead of the Board's previous expectations."

In comparison, at the end of August, HSS warned that in the six months to 1 July, reported losses before tax grew to £30m from £8m in the same period last year and sales fell 3.4%. Adjusted underlying earnings before interest, tax, depreciation and amortisation slipped to £17m from £32m. Managment blamed the rising losses on costs associated with "substantial operating model changes."

However, despite these diverging fortunes, I believe that both companies could be great turnaround plays.

Undervalued growth

The opportunity with Speedy is clear. The company has managed to slash costs, reduce debt and revenues are rising. City analysts had been expecting the company to report earnings per share of 29% for the full-year, although it now looks as if this forecast is out of date. Still, based on these old figures the shares are trading at a forward P/E of 16.1 and PEG ratio of 0.6 signalling growth at a reasonable price.

It's a little harder to see the value at HSS. Analysts believe that the company will report losses for the next two years as it struggles to turn the business around. Adding to the company's woes is the fact that it has £230m of net debt, which it is due to refinance next year.

If management can successfully renegotiate this debt with the company's banks, investors' confidence might return. With the shares trading at a price-to-book ratio of around 0.5, it certainly looks as if HSS is an attractive value investment.

But what are the chances of the company successfully renegotiating a debt refinance? Well, with HSS in the midst of a dramatic overhaul, banks are unlikely to pull the plug straight away. That said, any refinancing might come with more stringent demands from lenders, such as higher interest rates and lending constraints.

So, I believe that the company will see its borrowing facilities renewed, and this, coupled with the outcome of the strategic revenue, due in November, should bolster confidence in the firm's outlook, leading to a re-rating of the shares.

Time to buy, sell or hold?

Investing in turnaround situations can be lucrative but more often that not you could end up falling into a value trap. To help you avoid value traps, the Motley Fool has put together this free report titled The Worst Mistakes Investors Make.

The report is a compilation of errors all investors make that can cost you thousands in lost profits but are easy to avoid. By being aware of these mistakes, hopefully, your investment performance will dramatically improve.

The report is entirely free so what have you got to lose? Click here to get your copy today.

Rupert Hargreaves does not own shares in any company 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.

///>