5 More Beaten-Down Turnaround Candidates for 2018

January 11, 2018 by Jon C. Ogg

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The stock market gains of 25% in the Dow and 19.4% in the S&P 500 Index in 2017 were initially followed by strong gains at the start of 2018. Still, this is a market full of stocks. It is no secret that some stocks do better than others during the various phases of business cycles. It is also almost never the case that some companies perform so badly that their shareholders would never know it was a raging bull market if they only looked at the weak company.

Many investors are wondering exactly where they should be committing their funds in the months ahead. Investors were rewarded handily in recent months and years when they bought the indexes after pullbacks. That has not been the case for some of those disappointing stocks. Still, if nothing lasts forever then it may be a ripe time for investors to start thinking about value stocks. And in the “value” theme there are almost always some solid turnaround candidates that make for great investments if the companies deliver on their plans.

Along with tax reform taking the corporate rate down to 21% from 35%, one solid backdrop expected to be in place in 2018 is accelerating GDP growth, back to perhaps above 3%.

For the 24/7 Wall St. base case of the Dow heading toward 26,500, as well as 2,850 on the S&P 500, at least some participation from some unexpected and underperforming areas will be needed. This is where some of the battered stocks that can be turnaround candidates can come into play.

24/7 Wall St. is featuring several groups of turnaround stock candidates during the first full trading week of 2018. Some of these companies have been severe disappointments for Main Street investors, and some of them were disappointing for far longer than just in 2017. Still, there is the real risk that some companies may simply be unable to turn around in a way that can please investors.

Here, trading data and commentary has been offered up on five turnaround candidates for 2018. Thomson Reuters has provided consensus estimates. Note that another five potential turnarounds for 2018 have already been featured.

Mattel

Mattel Inc. (NASDAQ: MAT) is a stock that has much potential to do better, but there continue to be many risks. The toy business is vast, and there are many non-toy “toys” that kids occupy their time with (TV, smartphones and tablets, and video games). The toymaker was down 44% in 2017, but its ex-Google CEO really wants to turn this ailing toy giant around and get its operations up better in China and elsewhere. Analysts expect a loss of 12 cents per share for the last year, but the coming year is expected to return to a $0.38 per share profit despite close to an expected 1% decline in revenues.

On January 8, Citigroup raised its target price to $19 from $16 as a gesture that perhaps things are no longer as dire for investors as they may have seemed. And Mattel was able to borrow $1 billion for seven years late in December, even if it was with a 6.75% coupon on the notes. Neither of those sounds great, but turnaround investors often have to worry about “less bad” before they can ever think about “great” in a turnaround story.

A serious risk is what happens with Toys “R” Us due to such a large exposure there. The flipside of the Toys “R” Us argument is that Mattel may greatly reduce its retail exposure ahead if it does not have to worry about receivables and inventories as much.

Mattel closed out the year at $15.38, and it was a $15.72 stock after a full week of trading in 2018. That being said, this was a $48 stock in 2013. Mattel has a 52-week trading range of $12.71 to $31.60. Its consensus analyst price target is $15.17, and the market cap is $5.3 billion.

Newell Brands

Newell Brands Inc. (NYSE: NWL) was down just over 30% in 2017, but its top last year was roughly $55. This consumer brands player ended 2017 at $30.90 a share. The shares were barely above $31 after a full week of trading in 2018.

Newell has dozens of brands, and it has been cutting down on its vast numbers of brands to focus on growth, dominance and margin. Of course it has the competitive retail market as a risk, but Newell’s stock has dropped so much that it is valued at only about 11 times earnings, and its dividend yield is now close to 2.9%.

On January 5, Oppenheimer raised its price target on Newell to $35 from $33. That is a “less bad” endorsement, considering how much the stock is down. It is hard to know if Newell will win under tax reform because its effective rate of 27.3% in 2016 is expected to be 20.9% in 2017 and then 25.7% in 2018.

Newell has a 52-week range of $27.46 to $55.08 and a consensus price target of $36.86. Its market cap is $15.3 billion.

Papa John’s

Papa John’s International Inc. (NASDAQ: PZZA) was down over 24% in 2017, with the owner getting into the NFL player debates effectively getting him forced out of his own company. That being said, Papa John’s closed 2017 at $56.11 per share, and its shares were at $59.00 after the first full week of trading in 2018.

Whether you can blame any weakness in Papa John’s sales to weakness in the NFL remains up for debate, but the stellar CEO at Domino’s has now signaled his resignation, and that may make for a slightly less stable top competitor in the world of pizza delivery. Papa John’s has a 1.6% dividend yield, but it is still valued at about 21 times expected earnings.

What makes for an interesting story here is that one of the drivers of weak NFL ratings has been the endless number of injuries of key players in the 2017–18 season. Many of those key players will be back next year, and analysts are calling for revenues to still rise 4% for the past year and 2.3% in the coming year. What if growth turns out to be better? Papa John’s should also be a tax reform winner after having had effective rates of just above 30% in each of the past three years.

The pizza delivery chain’s shares have a 52-week range of $55.05 to $87.85 and a consensus price target of $70.25. The market cap is $2.1 billion.

Rite Aid

Rite Aid Corp. (NYSE: RAD) was down an embarrassing 76% in 2017, after regulators blocked an acquisition of the company. Now the drug store chain has sold off a slew of branches and supposedly wants to rekindle some dominance. The one consideration to keep in mind here is that Rite Aid is unlikely to ever reach the same value as expected in the past due to its much smaller footprint.

At $1.97 apiece at the end of 2017, and even after earnings were lackluster, Rite Aid’s shares after more than a week of trading in 2018 were at $2.13. Rite Aid could be a big winner in tax reform as it is expected to have a 35% rate in 2017 and a lower rate in 2018. Perhaps more important is that Rite Aid is expected to get back to a small profit in calendar 2019, but what if that return to profit comes back sooner than expected?

Rite Aid has a 52-week trading range of $1.38 to $8.77 and a consensus price target of $2.11. Its market cap is $2.1 billion.

Sally Beauty

Sally Beauty Holdings Inc. (NYSE: SBH) was down about 29% in 2017, and after closing the year at $18.76, its shares were down at $17.80 just over a week into 2018. This do-it-yourself chain for buying beauty supplies has small format stores that are not the most expensive to operate. It also should be a destination for ways to save money if economic times are an issue.

Sally could be a winner under tax reform as well, with an effective rate that was above 37% for each of the past three years and expected to remain that way. What’s amazing is the drop in the stock price at Sally Beauty has been worse than its earnings, and earnings are expected to be up in 2018 and 2019. It’s also valued at less than 10 times expected earnings, and analyst downgrades seem to almost have too negative of a tone to them. This company also has been thought of as a company that could be taken private by small private equity players.

Sally Beauty has traded in a 52-week range of $14.05 to $26.98, but this was almost a $35 stock in 2015. It also had a consensus analyst target of $16.60, and its market cap is $2.4 billion.