Sometimes, the most profitable investments are in those companies that are able to turn poor performance into stunning growth. In other words, if the market expects a disappointing period of financial performance and the company is able to significantly beat forecasts, then it can lead to vast share price growth.
The problem, though, is knowing when a company will turn its fortunes around. And, with it being difficult to 'catch a falling knife' it can be best to wait for evidence that a business is on the right track after a disappointing period of past performance. After all, you may miss the initial spike in its share price, but you are also likely to miss out on the potential for further weakness in its valuation.
That's exactly the situation regarding Coca-Cola Amatil Ltd (ASX: CCL) and AMP Limited (ASX: AMP). Both companies have had troubled pasts but are now on the road to recovery, thereby making now a great time to buy a slice of them.
In fact, Coca-Cola Amatil is forecast to deliver earnings growth of 5.4% per annum during the next two years, which is a vast improvement on the 22% fall in its bottom line which occurred in the previous five years. The key reason for such a major change is an improved strategy, with Coca-Cola Amatil focusing on driving through cost savings, making itself more efficient and also investing in exposure to faster-growing markets, such as across Asia.
Furthermore, Coca-Cola Amatil seems to be responding to a gradual shift in customer tastes, with its new Coca-Cola Life product using more natural ingredients so as to improve the company's relevance and appeal to a more health-conscious consumer.
Meanwhile, AMP is also in the midst of improving upon a performance that has seen its bottom line fall at an annualised rate of 11.4% during the last ten years. In fact, AMP posted a growth in its earnings of 29.2% last year and, looking ahead, they are expected to surpass $0.41 on a per share basis next year; up from $0.29 last year. That would represent a superb turnaround, with AMP being successful in reducing its cost to income ratio and increasing its underlying return on equity figure to 12.7% in financial year 2014.
Of course, neither Coca-Cola Amatil nor AMP are dirt cheap, but they do offer good relative value for money at the present time. For example, Coca-Cola Amatil has a price to sales (P/S) ratio of just 1.38, which is lower than the ASX's P/S ratio of 1.5, while AMP has a price to earnings growth (PEG) ratio of 0.93 versus 1.32 for the ASX. As such, both stocks offer upward rerating potential and, in the meantime, come with yields of 4.6% and 4.4% respectively. As such, their total returns should be very impressive, with their turnaround stories having commenced but still offering excellent share price appreciation potential.
