Investing in beaten-down companies can be a risky move, but it has the potential of being a highly lucrative strategy, if you play your cards right. The problem with heavily sold-off companies is the uncertainly of when, if ever, the freefall is going to end. However, identifying potential tailwinds that other investors are too distracted to see can very well be your competitive edge to finding quality companies at a cheap price.
If you're interested in purchasing potential turnaround success stories, here are two beaten-down stocks. One of which I think offers enticing future prospects at a ridiculous price, and another that lacks long-term tailwinds to justify a buy.
1. QBE Insurance
It's been a dreadful year for insurer, QBE Insurance Group Ltd (ASX:QBE), with its share price plummeting 50% in the past year, hitting almost 10-year lows. The recent slowdown in its share price is a result of numerous overpriced acquisitions and an unfortunate run of natural disasters in 2011 and 2012, causing insurance margins to fall from 15% to lows of 7%.
In response to these events however, QBE has undertaken some important changes, in order to regain its composure and offset last year's losses.
Without a doubt, QBE's most important transformation is its restructuring program which started in 2013, aiming to push margins back up by improving overall efficiency and costs. These changes are mainly targeted at its lagging US division which makes up about 40% of QBE's written premium income. If successful, these alterations are expected to bring about $250 million worth of cost savings by the end of 2015.
Insurers may be unpredictable in nature, but given QBE's future prospects and the fact that it trades on a cheap price-to-earnings ratio of 11.5, I think the recent freefall of QBE's share price offers an opportunity for investors to purchase the insurer at a discounted price.
2. The Reject Shop
The Reject Shop Ltd (ASX:TRS) has also been punished by investors, with its share price falling over 40% in the past year. The Reject Shop has been one of the many unlucky retailers hit by weaker consumer confidence levels, putting downwards pressure on profit margins.
But what particularly worries me is the retailer's lack of performance in stores located in major shopping centres, primarily from weaker foot traffic and higher competition. In its most recent annual report, The Reject Shop inferred that these stores had continued to drag down quality growth from its other branches.
With a new CEO, The Reject Shop will be aiming to transition out of its store expansion policy and aim to optimise its store networks. However, this will take some time to implement and given the fact that the persistent slowdown of consumer confidence continues to limit profitability, The Reject Shop does not seem to have any significant long-term tailwinds to drive earnings growth any higher.
Trading on a hefty price-to-earnings ratio of 18.67 and forecast to deliver negative earnings growth, I think The Reject Shop's share price dip is well justified. I will definitely be watching out for further updates, but in the meanwhile, it's a hold for me.
