More than five years since markets bottomed in the extraordinary aftermath of the credit crisis, a new generation of turnaround stories is emerging.
But as the FTSE 100 hovers over the 6,600 mark, seeking to shake off the spectre of geopolitical risk, some say these stories are becoming harder to identify and will take time to deliver.Nevertheless, the case for recovery stocks is clear. Those that backed the likes of ITV during the depths of the recession in 2009 will have benefited from a share price uplift of 381%, as a new management team restructured the business.
So, where do the turnaround stories lie as we move into the second half of 2014? For Schroders Recovery manager Nick Kirrage (pictured), the banks represent his first port of call. ‘Everything is changing there. Cultures are changing but share prices have not changed,’ he said.
For those brave enough to back the unloved sector, patience is likely to prove a virtue, though, as Kirrage believes the sector is o nly part way through a multi-year recovery story.
As an investor who seeks to target companies that are hated by the market, where share prices are ‘falling at a rate of knots’, Kirrage highlights supermarkets as another area of interest, home to a number of companies that could be embarking on a turnaround process.
‘UK supermarkets are absolutely despised. They are very much lepers in the market at the moment. The story is absolutely horrible,’ he said, highlighting structural pressures from hard discounters and the internet.
While supermarket chains such as Tesco are down by about 35% over the past three years, Kirrage acknowledges they may not have bottomed yet, but valuations look attractive nonetheless. He owns Tesco and Morrisons.
‘They are generally despised but there are quite high barriers to entry. These are big, known, well-respected brands that are able to pass on inflation. There is quite a lot to like,’ he added.
Kirrage is not the only one keeping a keen eye on food retailers. Ardevora’s A-rated William Pattisson has been drawn to Sainsbury’s, representing his team’s first foray into the sector for several years.
He highlights a change in management behaviour and welcomes the recent deal with Danish retailer Netto, which will see Sainsbury’s taking a 50% stake in a new Netto chain. This shows that Sainsbury’s is at least attempting to tackle the threat posed by discounters, he said.
He also expects to see a recovery in the share prices of specialist engineers. Although the likes of Spirax Sarco, Rotork and Senior – all held by Pattisson and co-manager Jeremy Lang – have suffered at the hands of investor fears of a slowdown in global growth alongside sterling strength, he suspects things should soon bottom out.
He does not expect sterling to perform as strongly over the next 12 months and points out that these stocks have now factored this into their forecasts. ‘The big headwinds are starting to dissipate. These are interesting businesses,’ he said.
On a six-month to one-year view, he said the recent rotation and sell-off in economically sensitive stocks presented opportunities to buy into companies that are posting healthy earnings but have been penalised by the market. He cited ARM Holdings, Tui Travel and Howdens Joinery as examples of such cyclicals.
However, Pattisson does not share Kirrage’s enthusiasm on banks, taking the view that management behaviour has not changed markedly in the sector. He was, however, attracted into TSB’s recent IPO on account of its lack of legacy issues, clean balance sheet and the incentivisation for the business to be run in a sensible way.
He also has concerns about mining stocks. He said: ‘Management talk about reducing capacity. There is talk about it but they are not doing it.’