One turnaround stock I'd buy alongside this unloved 5% yielder
Companies capable of delivering successful turnarounds can be hugely profitable for investors. Of course, there is always a risk that they'll be unable to generate improving financial or share price performance. But if the potential rewards outweigh the risks then they can prove to be worthwhile investments for the long term.
Reporting on Wednesday was one stock which is due to record a return to profitability over the next couple of years after a difficult period. Similarly, another 5% yielder also reporting Wednesday could return to share price growth after a disappointing year. Both stocks could be worth buying right now.
Oil and gas explorer and producer Ophir Energy(LSE: OPHR) experienced a somewhat challenging 2017 financial year, having failed to achieve the Fortuna project final investment decision despite having made significant progress on the project. However, progress was made on meeting operational targets, as well as in rebalancing its portfolio.
The company appears to be approaching a more sustainable business model. It was able to reduce general and administrative expenses by 17%, while growing reserves by 13% and increasing net funds flow from production by 46%. It also seems to be in a strong position to deliver on its goals of growing production and cash flow in the 2018 financial year.
Clearly, the last few years have been tough for Ophir Energy. A lower oil price and reduced confidence in the industry have led to a disappointing financial performance. However, with the oil price having risen and its strategy beginning to have an impact on its performance, the company is due to return to profitability in the 2019 financial year. This could boost investor sentiment and lead to a rising share price.
Also offering turnaround potential is British American Tobacco(LSE: BATS). The company's share price has fallen by around 18% in the last year as uncertainty surrounding the prospects for the US tobacco industry have caused investor sentiment to decline. The FDA (US Food and Drug Administration) has mooted potential proposals for major reductions in the nicotine content of various products, which could severely hurt sales in the country.
With British American Tobacco increasing its exposure to the US following the acquisition of Reynolds, it could be hit hard by the potential changes. However, with the stock now having a dividend yield of around 5% and a price-to-earnings growth (PEG) ratio of just 1.6, it seems as though investors have fully priced in its risks.
The company has a solid balance sheet and strong cash flow, while its exposure to next generation products means it could be in a good position to deliver long term earnings growth. As such, and while its near term share price performance may disappoint, its long term investment potential appears to be excellent.
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Peter Stephens owns shares in British American Tobacco. 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.