Here are the three stocks that gave the most pain to their holders over the last 10 years. 

Wealth killer

Considering the sea change in the fortunes of many high street retailers over the last decade, it is not surprising that two of them make the cut.

In bronze medal position is baby goods seller Mothercare (LSE: MTC). According to Refinitiv, shares in the battered firm lost almost 96% of their value over the last decade, with a compound annual growth rate of -27.23%. 

Mothercare’s demise is a cautionary tale on the importance of moving with the times, at least as far as UK trading is concerned. While factors such as rising wages and expensive rents clearly played a role, it was the company’s inability to offer shoppers something distinct in terms of quality, price, or convenience that proved to be the final nail in its coffin.  

With no sign that the onslaught from online-only operators is going to slow anytime soon, I think we can be fairly sure that Mothercare won’t be the last once-mighty name to fold.

Money pit

The fact that a commodity-focused firm makes the list is another non-surprise. Weak prices led the Basic Materials sector to perform particularly poorly over the last decade with an annualised growth rate of just 3.1%.

Occupying second spot on our list of stinkers is Russian gold miner Petropavlovsk (LSE: POG). Its shares fell a little more than 96% over the period, with a compound annual growth rate of -27.68%.

That’s not to say that the company is done for. Despite its valuation tumbling over the years, Petropavlovsk remains a sizeable business with a market capitalisation of a little over £400m. What’s more, holders enjoyed a steller 2019 with shares almost doubling in value. 

With the gold price continuing to rise on concerns over the health of the global economy, it’s possible to imagine this stock could still make money for those brave (or reckless) enough to buy it. Just don’t expect a comfortable ride. 

And the winner is….

Mothercare and Petropavlovsk have been awful stocks to own since 2010. There is, however, one UK-listed firm that’s fared even worse. 

Top spot among the worst shares over the last decade goes to floor covering supplier Carpetright (LSE: CPR). The value of the company fell 99% over the last decade with a compound annual growth rate of almost -40%.

Like Mothercare, the firm’s value was destroyed by a challenging consumer market and crippling finances. It agreed to be purchased for a paltry £15.2m by its largest shareholder (Meditor) last November. At the time, the Purfleet-based business owed around £56m and said that it needed £80m if it was to return to growth. 

The fact that the stock traded around the 800p mark in 2010 and sold for just 5p per share a decade later shows just how brutal a game investing can sometimes be. It also provides Fools with a reminder of the importance of exiting a losing position as early as possible if the investment case changes. 

The post Stand back! Here are the WORST performing UK stocks over the last decade appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares 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.

Here are the three of the biggest losers in 2018 so far.

Must do better

No prizes for guessing department store retailer Debenhams (LSE: DEB) features on the list. Following multiple profit warnings, the shares are down 66% since the start of the year. For regular readers of these pages, this should come as no surprise. Many at the Fool — including myself — have been bearish on the business for a while.

Earlier this month, the company was forced to reaffirm its cash position after it was reported that credit insurers had refused cover for some of its suppliers, meaning that the latter would not be protected if Debenhams went bust. In such a situation, these suppliers could demand payments from the company in advance, hence the suspected pressure on its cash pile.

As one of the most shorted stocks on the market, it would seem that many do not share management’s confidence in Debenhams’ financial health. While betting against a company can certainly backfire (Ocado, anyone?), I’m inclined to think that the business is highly likely to follow BHS to the retail graveyard.

Trainer seller Footasylum (LSE: FOOT) is another heavy faller this year — down 72%. For a company that’s only recently listed, that’s pretty inexcusable.

Despite revenue and adjusted EBITDA moving 33% and 12% higher respectively over the last financial year, statutory pre-tax profit dived from £8.1m to £1.9m due to costs associated with its IPO. 

With the company hinting that it had become yet another victim of high street malaise, forward guidance was also disappointing with growth now expected to slow as a result of investment to capitalise on peak trading periods in the second half of the year. Suggestions that top brands are becoming increasingly keen on selling to customers directly could also be problematic for firms in this space going forward.

Footasylum isn’t necessarily down and out but a P/E approaching 16 still looks far too expensive when there are less risky options elsewhere.

Holding the dubious gold medal position for worst performing retail stock — and ironic share ticker — over the last seven months goes to Carpetright (LSE: CPR) with holders enduring an 83% fall in the stock since January. Quite whether the shares can be resuscitated from here is debatable.

To recap, full-year results (to the end of April) were simply awful, revealing an underlying pre-tax loss of £8.7m in stark contrast to the £14.4m profit a year earlier. As suppliers grow increasingly cautious, Carpetright’s balance sheet also looks seriously stretched with net debt over five times what it was in 2017. 

As part of its Company Voluntary Arrangement, the firm will close 81 of its stores by the end of September. Those remaining are being refurbished and new branding introduced in an attempt to drum up business.  

But with talk of restructuring activity and the warm weather having a big impact on trading in the first eight weeks of the financial year, I don’t hold out much hope for those still invested.   

The post The 3 worst performing retail stocks of 2018 (so far) appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares 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.

The group’s shares have fallen by nearly 75% since my last article, as further updates have revealed continued poor trading.

During the 12 weeks to 30 December, UK like-for-like sales fell by 7.2%, while UK online sales fell 6.9%. International sales were 3% lower during the period, excluding currency effects.

The good news is that the firm’s sales performance did improve slightly during the final quarter of the firm’s financial year, which runs to late March. UK like-for-like sales only fell by 2.8% during this period, while UK online sales returned to growth, rising by 2.1%.

However, international sales continued to worsen, falling by 3.7% during the final quarter. Full-year sales for the whole group are expected to be 1.9% lower than last year.

More shareholder cash required?

Despite raising £100m from shareholders in 2014, Mothercare’s net debt was expected to be about £50m at the end of March. As of 12 April, the company remained in discussion with lenders about refinancing.

One reason for this delay may be that lenders are waiting for the firm’s new chief executive, David Wood, to produce a fresh turnaround plan. Recent press reports suggest that this might include a company voluntary arrangement (CVA) to allow the firm to close about 47 of its 143 stores.

If this happens, I’d also expect the lenders to require an equity fundraising to improve the group’s cash position. Mr Wood may have been referring to this in comments on 12 April, when he said that Mothercare was continuing “to explore additional sources of funding”.

A glimmer of hope?

Looking ahead, broker forecasts suggest that adjusted earnings could recover to 2.4p per share in 2018/19. This gives the stock a 2018/19 forecast P/E of about 7.5.

This might seem cheap, but if new shares are issued as part of a restructuring, existing shareholders could face significant dilution. I think it makes sense to wait until the company has completed any refinancing before considering whether to invest.

This is how it could work

Mothercare isn’t the only well-known retailer with financial problems. Flooring specialist Carpetright (LSE: CPR) has seen its share price fall by more than 70% since it reported a “sharp deterioration in UK trade” with a “significant impact on profitability” in January.

However, Carpetright appears to be several steps closer to a solution than Mothercare. On Thursday, the company announced details of a CVA proposal that would allow it to close 92 sites, and agree a rent reduction on a further 113 sites.

If the firm’s landlords approve this plan, then management also plans to raise £60m through an equity placing and open offer. This cash will be used to help reduce debt and fund the group’s turnaround plans.

I’m not rushing in

Without its lossmaking stores, Carpetright’s profitability could improve significantly. This could become an attractive recovery play.

The problem for small investors like us is that if the plan is approved, most of the new shares will be issued to institutional buyers. They may well be sold at a big discount to the current share price. If this happens, the existing shares could fall sharply.

On balance I think it’s probably still too soon to buy, but I’ll be watching this situation with interest.

The post Can the Mothercare share price make a successful comeback? appeared first on The Twelfth Magpie.

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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any of the shares 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.

It turns out that was a canny decision, as Thursday brought another warning — and a further 30% share price slump during morning trading. As I write, the price has recovered a little to 58p, but is still 25% down on the day. And down 90% since a peak of more than 600p in June 2015.

Trading conditions “have remained difficult, characterised by continued weak consumer confidence,” which really shouldn’t come as any surprise. As a result, Carpetright’s UK like-for-like sales are still falling (though at a softening pace), and remain below the firm’s expectations.

The bottom line is that we should now expect an underlying pre-tax loss for the year to April.

Bankers

That has inevitable liquidity and balance sheet implications, and the company is talking to its bankers to ensure it doesn’t break the terms of its borrowing facilities. At the same time, there’s an effort being made to work out how to strengthen the balance sheet, though at this stage there are no further details.

The City had already been predicting a 75% fall in EPS this year and a modest pre-tax profit, though forecasts for the next two years would see earnings recovering by approximately 50% each year to bring the P/E down to seven by 2020.

That’s meaningless now, and the optimism seems misplaced at the moment. 

It’s possible that Carpetright might be at the point of maximum pessimism right now and that buying would be a smart move. But with discretionary spending tight and the retail sector hurting, and with other safer stocks on offer, I see no need to take the risk.

Biggest fall

The biggest nominal fall on Thursday saw industrial software specialist Aveva Group (LSE: AVV) shares apparently losing more than a third of their value.

It’s due to its readmission to the market after the completion of a reverse takeover with the software arm of Schneider Electric of France. The readmission includes Aveva’s original 64m shares, plus 97.2m new shares issued to Schneider as part of the deal. But what are we to make of the new beast?

Aveva’s shares had stormed ahead over the past two years, gaining 130% by the end of January 2018, presumably in expectations of the firm’s earlier growth pattern resuming after a break of a couple of years. And that might indeed be on the cards, after a brief update on 15 February (following Schneider’s 2017 results) told us that the two companies’ joint assets “experienced continued growth in [their] Licencing and Maintenance revenue streams, partly offset by a slight decline in Services revenue.“

More sensible valuation?

One problem is that forecasts prior to Thursday put Aveva shares on a high fundamental valuation, with a forward P/E of nearly 40. That might be fine for a company with very strong earnings growth expectations, but single-digit EPS forecasts would have dropped that only as far as 34 by 2020.

The new Aveva makes those forecasts obsolete and we’ll need to wait for updated forecasts for the merged operation. We might have a more sensible valuation when it all works out, but I’d probably want to wait for a full year of results following the merger.

The post Should you pile into small-cap stock Carpetright plc after 30% crash? appeared first on The Twelfth Magpie.

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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any of the shares 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.

Of course, difficulties for UK-focused retailers are not particularly surprising. With consumer confidence being low and inflation remaining stubbornly high, things could go from bad to worse for the company during the course of 2018.

Difficult period

Its trading during the key Christmas period was significantly worse than expected. Like-for-like (LFL) sales in the UK declined by 3.6% in the 11 weeks to 13 January 2018. This caused total sales to fall by 2.3%, with profitability for the remainder of the year set to be much lower than expected.

In fact, the company is now forecasting a profit in the range of £2m-£6m for the year. It would be unsurprising for this figure to be revised downwards, since there seems to be little scope for a sudden recovery in the coming months. Consumers are feeling the pinch of disappointing wage growth coupled with higher inflation. This means that purchases of discretionary items such as carpets and flooring are being delayed.

With Brexit talks ongoing and confidence in the UK’s economic outlook being relatively low, it is difficult to see how the company’s fortunes could improve in the near term.

Valuation

With Carpetright now trading at a major discount to its previous valuation, some investors may be tempted to buy it as a recovery play. While the company’s international stores continue to deliver sales growth and its refurbishment programme may help it to compete more effectively against rivals, the fact is that it faces an uphill struggle in the near term.

Challenging trading conditions look likely to remain in play, and with margins set to fall, the company’s share price could do likewise during the rest of the year.

Turnaround potential

Investors looking for a potential turnaround opportunity may be better off with RBS (LSE: RBS). While it operates in a completely different sector to Carpetright, RBS has also experienced a difficult period in recent years. Legacy issues, the cost of PPI and poor performance from some of its divisions have meant that its outlook from an investment perspective has been relatively uncertain.

However, the company now seems to have a bright future. It is forecast to generate earnings growth of 5% this year, followed by further growth of 8% next year. This puts it on a forward price-to-earnings (P/E) ratio of around 10.4, which suggests that it offers a wide margin of safety. This could mean that its downside risks are low and there is significant upside potential.

One possible catalyst to push the RBS share price higher is its dividend prospects. The firm is expected to raise the payout by 80% in 2019, which puts it on a forward yield of 5.3%. With dividends expected to be covered 1.8 times by profit, they could rise further in future years.

The post Why I’d still sell Carpetright plc even after today’s 40% discount appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in RBS. 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.

City analysts are forecasting earnings per share (EPS) of 82.55p for its financial year to 31 March 2018, followed by 86.4p for fiscal 2019. At a share price of 675p, the price-to-earnings (P/E) ratios are in the bargain basement at 8.2 and 7.8, while well-covered forecast dividends of 29.45p and 30.85p give tasty yields of 4.4% and 4.6%. Why so cheap?

Aggressive accounting?

There’s some fretting about the UK’s exit from the European Union and UK defence spending but the bigger concerns for me are the questions raised in a broker note put out by Morgan Stanley (MS) earlier this month.

I’ve previously looked in some detail at signs of aggressive accounting at other outsourcers (which have recently come home to roost), and MS raises similar concerns about Babcock. These include the trend in unbilled receivables, where certain balances, such as accrued income, have been growing well ahead of revenue, “suggesting that some form of credit extension is being used to drive sales.”

In a statement yesterday, Babcock emphasised it takes “a prudent approach to contract accounting,” but the market gave this reassurance only a muted response and I remain concerned about the numbers in the accounts. MS downgraded Babcock from Overweight only as far as Equal Weight in its note but, personally, I’m inclined to err further on the side of caution and view the stock as a ‘sell’.

Floored

Carpetright (LSE: CPR) is a stock I’ve been bearish on for a good while and first-half results from the company today have done nothing to change my view. It reported underlying profit before tax of £2.1m for the 26 weeks ended 28 October, which was about £1.4m below market expectations. Meanwhile, the balance sheet moved to net debt of £22.8m at the period end from net cash of £0.4m at the same time last year.

Furthermore, management said that after a “challenging” first half “we are taking a more cautious view of the second half and now expect underlying profit before tax for the full year will be towards the bottom end of the current range of market expectations.”

A lot further to fall?

Admirably, the company states explicitly what those expectations were: namely, “consensus … £15.2m, with a range from £13.8m to £16.5m.” I calculate we’ll see EPS of sub-15p on the new guidance, which, with the shares down 5.6% on the day at 175p, gives a P/E of no lower than 11.7.

Amidst the unfolding Brexit story, the company acknowledges “declining consumer confidence and an increasingly competitive landscape.” With consumer debt at historically unprecedented levels and the cost of living squeeze intensifying after figures today revealed inflation hit a near six-year high of 3.1% in November, I believe Carpetright’s earnings are likely to come under still more pressure in the coming months and that its shares could have a lot further to fall. On this basis, I rate the stock a ‘sell’.

The post This Neil Woodford favourite isn’t the only stock I’d sell today appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares 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.

Such a decline reflects the fact there was nothing particularly terrifying about the valve-builder’s latest update. Having said that, I reckon those seeking robust earnings growth in the near term and beyond should perhaps look elsewhere.

Rotork announced that organic revenues at constant currencies flatlined between January and June, at £299.7m. As a result, adjusted pre-tax profit slumped 7.5% at stable exchange rates, to £52m.

In more reassuring news, however, the firm announced that its order book at constant exchange rates had rise 16.5% during the first half, to £213m.

Following the results, newly-minted executive chairman Martin Lamb commented that “the slightly more favourable market trends seen towards the end of 2016 continued in the first half of 2017. In oil and gas, we have seen an improvement in levels of activity in upstream and although the midstream and downstream sectors remain subdued, there has been a gradual improvement in project activity levels.” 

Meanwhile, Lamb noted that the company had made “steady progress” across the water, power and industrial process markets.

Pump-builder in peril?

Rotork’s stock price slid lower in late July after the sudden departure of chief executive Peter France. The company said that the departure “[followed] a period of reflection by the Board, together with Peter, on the steps required to foster a return to higher growth and margin levels in what is likely to be a generally lower-growth macro environment.”

These steps included bolstering investment in key areas like product innovation and customer service, as well as improving greater efficiencies throughout the business, the firm said.

The outlook for Rotork is clearly uncertain, and not just because conditions in the critical fossil fuel market remain extremely difficult. While Brent values may have sprung back above $50 per barrel in recent sessions, black gold prices will likely find it hard to make much more ground as market oversupply worsens.

The City expects Rotork to enjoy a 7% earnings uptick in 2017, and a 9% rise is slated for next year. Still, I reckon a subsequent forward P/E ratio of 21.8 times fails to reflect the strong possibility of earnings growth disappointing in both the near term and beyond.

On the floor

Carpetright (LSE: CPR) is another London-quoted stock whose growth picture is looking far from assured at the present time.

Tuesday brought another set of worrying numbers from the British retail sector, this time being the turn of the BRC to chime in. The consortium declared that like-for-like sales rose just 0.9% in July, while sellers of non-food items saw takings contract 0.7% year-on-year.

This fresh batch of murky data comes as little surprise as inflation-ravaged shoppers rein in excessive spending, and particularly on non-essential items like furniture. And against this backcloth City analysts expect Carpetright to endure a 7% bottom-line decline in 2017.

The number crunchers are predicting an 18% earnings bounce-back next year, although I can’t help but feel that this is looking a tad optimistic right now. I reckon investors should steer well clear despite the retailer’s low paper valuation of 10.9 times.

The post 2 stocks with scary growth outlooks appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Rotork. 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.

Today’s news could hasten or delay that process, depending on your point of view. Northgate shares fell by 11% this morning, after the firm said its underlying pre-tax profit fell by 10% to £75m last year. The main problem was a slump in UK demand — a total of 39,500 vehicles were on hire in the UK at the end of April, down from 42,400 at the same point last year.

This weakness hasn’t prevented the board recommending an 8% hike to the full-year dividend, which rises to 17.3p per share. But it does raise questions about the group’s outlook against a backdrop of slow economic growth.

Here’s the plan

The first bit of good news is that Spain’s economic recovery is driving extra demand for vans. Vehicles on hire in Spain rose to 37,700 at the end of April, up from 35,700 at the same point last year.

The second piece of good news is that Northgate has an ambitious new boss, with clear plans for the firm’s growth. CEO Kevin Bradshaw’s last job was as UK managing director of car hire group Avis Europe. So he’s no stranger to the rental industry and should have a good understanding of market conditions in both the UK and in Spain.

Mr Bradshaw says that the company is lumbered with outdated IT systems and inefficient sales and marketing. Addressing these weaknesses should defend Northgate’s 31% share of the flexible rental market and enable it to expand more aggressively into the fast-growing contract hire market.

Today’s fall leaves the stock trading on a P/E of 10, with a dividend yield of 3.6%. I’m tempted and have added the stock to my watchlist for further research.

High street health test

Investors expecting carpet retailer Carpetright (LSE: CPR) to bomb after its results were given a surprise this morning. At the time of writing, the group’s shares are up by 11% at 200p, despite underlying pre-tax profit falling by 21% to £14.4m last year.

This surprise gain may be because today’s figures suggest that Carpetright’s efforts to revamp and update its stores are paying off. UK like-for-like sales (LFL) rose by 1.8% during the second half of the year. Management says the average LFL increase in refurbished stores was 6.8%.

Performance in Europe was encouraging too. This region accounts for less than 20% of sales, but contributed £5.7m — or 35% — of last year’s underlying operating profit of £16.4m.

The main risk I can see is that Carpetright’s profit margins appear to be under pressure. Revenue was broadly flat at £457.6m last year, but the group’s gross profit margin fell from 60% to 58.8%. Operating margin, which includes overheads such as staff costs, fell from 4.4% to 3.6%.

Investors will need to hope that the sales boost provided by revamped stores translates into stronger profits this year. With the shares trading on 11 times 2018 forecast earnings with no dividend, I’d argue the stock is priced about right for now.

The post Are these value stocks bargain buys after full-year results? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Northgate. 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.

Carpetright was last 7% lower after advising that “we have experienced tougher trading conditions over the last three months,” mirroring the misfortunes of much of the home improvement segment. And disappointingly the retailer noted that “the level of sales growth in our final quarter leads us to expect that full-year profits will be towards the lower end of the current range.”

The Essex business estimates pre-tax profits for the year to April 2017 at between £13.9m and £16.2m.

Carpetright saw like-for-like sales growth of 1.4% in the 12 weeks to April 22, cooling from the 1.9% rise printed in the prior quarter and down from growth of 1.7% in the corresponding 2016 period.

And while the carpets colossus has accelerated its store refurbishment programme to encourage customers through the door (Carpetright overhauled 188 outlets by the end of the quarter, beating its prior target of 150) this is likely to provide only token relief as inflation aggressively picks up.

Indeed, latest Office for National Statistics data showed British retail sales fall 1.4% during January-March, the first quarterly drop since 2013. The body’s consumer price inflation gauge currently stands at three-and-a-half-year peaks of 2.3%.

City brokers had been expecting Carpetright to bounce from a predicted 13% earnings decline in the current fiscal year with a 15% rise in 2018. But signs that recent sales weakness is intensifying could lead to swingeing downgrades beyond the outgoing year’s estimates.

So while it deals on a P/E ratio of 12.3 times for the upcoming year, a very attractive reading on paper, this is still not low enough to offset the probability of heavy forecast cuts in the near term and beyond as the UK high street struggles.

Poised to reverse?

And of course rising inflation is likely to dent shopper appetite for particularly expensive goods like cars, making me extremely bearish over Cambria Automobiles (LSE: CAMB) in the coming months.

Exploding car demand has seen the retailer enjoy double-digit earnings growth during the past few years. Total British sales hit a record 2.69m units last year, according to the Society of Motor Manufacturers and Traders, and latest data has showed momentum still picking up steam. Indeed, sales in March surged 8.4% to 562,337.

But last month’s gallop can be put down to shoppers piling in before new vehicle excise rules kicked in during April. And with an economic slowdown appearing likely, and windscreen prices set to rise as manufacturers pass on the impact of sterling weakness, I reckon sales are likely to stall from spring onwards.

Reflecting these more difficult conditions, the City expects Cambria to endure a rare 1% earnings fall in the year to August 2017. Although this still leaves the retailer dealing on a cheap P/E multiple of 8.5 times, the chances of a prolonged downturn would encourage me to steer well clear.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. 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.

Turnaround potential

It’s true that Carpetright no longer enjoys the same levels of sales revenue it did 10 years ago, and underlying earnings are just a fraction of what they were during those heady days, but I think the business is showing encouraging signs of turnaround potential.

In the last financial year the Essex-based retailer almost doubled its pre-tax profits to £12.8m, from £6.6m the year before, which in itself was a marked improvement from the disastrous £7.2m pre-tax loss it suffered for fiscal 2014. All the while underlying earnings have grown from just 4.7p per share in FY 2014 to a much healthier-looking 19.3p for the last completed financial year.

New brand identity

In its recent third quarter trading update the small-cap retailer announced a return to quarterly like-for-like sales growth in the UK, with a 1.9% rise in sales for the 13 weeks to the end of January. What is most encouraging is that like-for-like sales are up by an impressive 6.8% for the first four weeks in January, reinforcing my confidence that some kind of recovery is under way.

What’s also encouraging is that newly refurbished stores, which come garnished with Carpetright’s new brand identity, continue to outperform the un-invested estate, leading management to accelerate its refurbishment plan. The company is now trying to achieve a target of 150 refurbished stores by the end of April, representing around a third of the entire UK estate.

Analysts are forecasting broadly flat sales revenue over the medium term, but pre-tax profits are expected to climb significantly from £12.8m to £19.95m over the next three years. After a 40% share price slump in just 12 months, the shares are trading at a modest 13 times earnings for the current year, falling to just 10 by April 2019. I see Carpetright as a great recovery play with plenty of upside potential.

Controversy

Another famous retailer whose share price has been battered in recent years is the UK’s leading sports retailer Sports Direct (LSE: SPD). The share price has been under pressure over the past couple of years amid controversy surrounding the treatment of its warehouse staff as well as numerous profit warnings. The Mansfield-based retailer has seen the value of its shares fall by a fifth over the past year, with the share price now languishing around five-year lows.

But unlike Carpetright I don’t see the shares bouncing back anytime soon. Underlying pre-tax profits crashed 57% in the first half of the current financial year, and the City is expecting the decline in earnings to continue into next year. Despite the massive share price slump, Sports Direct’s shares are still not cheap, trading at 19 times forward earnings for the year to April. I would wait until the outlook improves.

The post Why I see 40% upside in this turnaround stock in 2017 appeared first on The Twelfth Magpie.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.