Turnarounds stocks are the ultimate contrarian play. You’re betting on a company other investors don’t believe in. Investing in companies that are working to improve their businesses or trying to cut their costs in the face of competitive threats is a high-risk but a high-reward strategy. If you do your homework well, you might make returns in the triple digits.
In most cases, turnaround situations may involve bankrupt companies that need to sell their profit-making divisions, or companies that need to spin off unprofitable divisions. Here are two such Canadian stocks for you to consider this summer.
Empire Company Limited
It’s a huge challenge for investors to pick the right retail stock at a time when this sector is under existential threat from the rapidly increasing trend of e-commerce. The changing retail landscape is hurting the margins of established names and forcing them to cut costs where they can.
Empire Company Limited (TSX:EMP.A), the parent company of the Sobeys supermarket chain, is in the middle of its turnaround plan aimed at reducing costs and making its western Canadian operations profitable.
Almost one year into this plan, the company’s balance sheet is back in a solid shape with sales, the gross margin, and capital spending all showing improvements. A 70% jump in the company’s share price during the past two years is also an indication that investors remain confident in CEO Michael Medline’s approach to save $500 million in costs by FY 2020 and position the company to compete better with its rivals.
Trading at $24.83, Empire Company stock has huge potential to gain if the management’s turnaround plan stays on course in the next two years. The Street’s consensus price target for the next 12 months is $28.30 a share, but I see it crossing $30 mark by the end of this year.
BlackBerry Ltd.
Another interesting candidate for contrarian investors to place their bets on is BlackBerry Ltd. (TSX:BB)(NYSE:BB), which is transforming from a smartphone maker to a software service and security provider after its bread-and-butter smartphone business collapsed.
BlackBerry has been counting on its QNX operating system and its software security division to propel growth. Early successes show that the company is on the right track, and that strategy is starting to pay off. All G7 governments and 15 of the G20 governments are BlackBerry customers, and so are an increasing number of enterprise companies concerned about cybersecurity.
In the automobile sector, BlackBerry has signed many deals with some top automobile companies that are getting ready for the autonomous car market. In the latest development, BlackBerry said that it will license its QNX software and Certicom security technology to Jaguar Land Rover Ltd. The company also won a deal to provide security capabilities to mobile products produced by Microsoft Corp., its once bitter rival in the smartphone business.
Trading at $15.87, BB stock is up about 70% in the past two years, giving handsome gains to investors who believed in its turnaround.
The bottom line
Both Empire and BlackBerry are good candidates for investors who have the stomach to take higher risks and the patience to wait while these companies work on restructuring. But investing in such stocks is a high-risk strategy that doesn’t suit everyone. So, it’s better to invest in these names only if you have spare cash for the risky ventures.
