Four unloved stocks set to recover

Ben Whitmore, manager of Schroder Recovery Fund tells MoneyWeek where he'd put his money now.

We tend to look for our investment ideas in areas of the market where there has been poor news and where expectations for the future are low. In many cases, this allows us to buy companies when they are trading on relatively low p/e multiples, something that provides both downside protection and the potential for good capital gains if profits then recover.

The companies below have a number of things in common. Their shares have all underperformed their respective industry sectors over the past year as a result of a downturn in operational performance. They remain out of favour with investors and tend to be on lower ratings than their peers. However, each firm also has a new management team endeavouring to restore profitability and sales growth: if they are successful, their shares should rise as profits recover. Finally, each of these companies has a strong balance sheet, something that should provide a floor to their share prices.

Cable & Wireless's (CW/) share price implies that the market is valueing its UK business at less than zero. It is the second-largest telecom carrier to BT in the UK and the industry is in a state of change, with many providers having become loss making. But if capacit is rationalised and profits recover, there is potential for higher profits. The rest of the business is made up of a large net-cash balance sheet and a diversified portfolio of local businesses around the world.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Following the failure of parts of its 'path-to-growth' strategy, Unilever (ULVR), by its own admission, has underperformed significantly. There is a new management team in place that is reducing bureaucracy, cutting costs and investing in the brands. The market is sceptical about their ability to achieve this and, as such, the shares are trading at a significant discount to their peers. Hopefully, the downside should be limjited as the market already has low expectations, whereas there should be significant upside if the business is run as well as ReckittBenckiser or Proctor & Gamble.

The market is worried about the outlook for Rentokil's (RTO) profits as margains have fallen over the last few years. The business hasn't received sufficient investment and has been run for short-term profit growth. But margins are now at, or below, other competitors and the new management team is looking to rebuild sales growth by investing in the business. The market is concerned about further margin deterioration and hence accords the business a low rating. If management reinvigorates the business, the shares could perform well.

Small-cap stock MyTravel (MT/S) is slightly higher risk than the other firms mentioned here. The business was in financial crisis and ended up forced to swap its debt into equity, resulting in significant dilution for existing shareholders. However, new shareholders arenow left with the prospect of a debt-free business with a new management team aiming to restore the profitability of the UK business. The market is not keen to give them any credit for this, but if it achieves its targets the shares should do well.

In the case of all these firms, new management is looking to restore profitability following operational problems. This will take time and will not be smooth path. That makes patience a vital ingredient of our investment style.