Three overlooked UK stocks with turnaround potential

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The Fidelity Special Values investment trust employs a contrarian value-investment approach, focusing on unloved companies with the potential for positive change. We evaluate the downside protection of a company before considering its prospects over a period of between three and five years.

We seek opportunities across the breadth of UK stocks, although there is a structural bias towards mid- and small-cap companies, as this is an under-researched area where we find attractively valued stocks with good turnaround potential.

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Three overlooked UK stocks

DCC (LSE: DCC), a UK stock which offers other companies energy, healthcare and technology services, is restructuring. It plans to focus mainly on energy, an area where it boasts a strong record of generating attractive returns on capital and growing through acquisitions. The firm fulfils our downside criteria, given that the shares are on a historically low valuation, while management is delivering substantial share buybacks, which are highly accretive to earnings power.

Market sentiment has been weak, largely owing to concerns around the structural decline of the group's fossil-fuel distribution business. However, we believe these fears are overdone and the substitution effect is likely to be slower than expected.

The highly consolidated nature of the industry enables established players to maintain strong margins and deliver attractive returns. Meanwhile, DCC continues to expand its renewable-energy activities, including solar installation and other energy-efficiency solutions. DCC's defensive characteristics – akin to those of utilities – and attractive valuation make it stand out as a compelling turnaround opportunity.

Best known for Sports Direct, Frasers Group (LSE: FRAS) also owns a broad portfolio of retail brands, such as Flannels, House of Fraser, Evans Cycle and USC. Its strength lies in its unique business model. Frasers Group leverages its scale and relationships with brands to acquire discounted stock in bulk from major labels (such as Nike and Adidas), supporting margins and profitability.

Unlike most retailers, it owns its retail sites rather than leasing them, providing it with a significant amount of backing from property assets. It also owns sizeable stakes in Hugo Boss, AO World, Asos and Mulberry, underpinning approximately 40% of its equity value and jointly implying that the core business trades on a very attractive low single-digit price/ earnings (p/e) ratio.

Standard Chartered (LSE: STAN) is an emerging market-focused bank that operates across Asia, Africa and the Middle East, providing retail, corporate and institutional services in some of the world's fastest-growing markets. Over the past decade, management has reduced the risk inherent in the business, streamlined operations and steadily advanced a turnaround strategy that is delivering tangible results.

The bank offers an opportunity to tap into strong emerging-market growth, which is a play on Asia's growing wealth. It is probably the fastest-growing regional wealth manager; this division generates about a third of the group's overall profits. Wealth managers are generally viewed as high-quality businesses, and tend to trade around 15 times earnings, whereas Standard Chartered trades like a bank on ten times earnings. Where the market's perception diverges from reality is where we see the opportunity.

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Alex Wright has 24 years of investment experience. He joined Fidelity in 2001 as a European equity research analyst, successively covering building materials, alcoholic beverages, leisure, emerging European and African banks and UK small-cap stocks. He became portfolio manager of the Fidelity UK Smaller Companies Fund in 2008. He continues to manage this fund alongside the Fidelity Special Situations Fund and the Fidelity Special Values PLC, which he started managing in 2012.