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Three turnaround stocks for 2014

Investors love turnaround stocks; they can deliver huge profits in a short space of time but are inherently risky. For every Fortescue Metals Group  (ASX: FMG) type rebound, there are numerous Newcrest Mining (ASX: NCM) like ongoing failures. The odds certainly aren’t in an investor’s favour, but careful research can identify stocks that may buck the trend.

The list of worst-performing companies in 2013 is littered with dumped energy and resources stocks, combined with the occasional failed biotech and oversold retailer. But which of the 684 companies on the ASX that have fallen more than 30% in 2013 are set for a rebound in 2014?

The first questions that should be asked are:

  • Why did the company’s share price drop?
  • Was it a function of management failure or drastic change in the way the business operates?
  • Can management turn the company around or convince the market that not all is as bad as it seems?

The three companies below are examples, I believe, of companies that have been oversold and should perform well in 2014.

Oroton Group (ASX: ORL) is down over 37% in 2013 after it lost an important contract to distribute Ralph Lauren (RL) clothing and accessories in Australia and its successful CEO Sally MacDonald departed. RL sales accounted for approximately 50% of earnings but the company has recently signed new deals with US labels Gap and Brooks Brothers and signed on a logical replacement in Mark Newman as CEO. While risks remain, Oroton Group should perform well in 2014 if it can hit its previous guidance and demonstrate some success from the new brands.

Monadelphous Group (ASX: MND) is a bit of a smoky for 2014. Most mining services companies have been hit hard as some groups delivered severe profit downgrades when expected contract work with the major miners didn’t materialise. While 2014 will likely be characterised by lower margins and earnings volatility, Monadelphous is a large and well-established company, with a superior management team to guide it through the current downturn.

QBE (ASX: QBE) delivered a dire profit downgrade in mid-December based on unforseen issues in its US insurance division. The downgrade will result in a $250 million writedown and continues a disappointing trend of QBE missing its own profit guidance. It’s not all bad news though! The loss is mainly a ‘paper loss’ brought about from one-time charges and writing off intangible assets – essentially just accounting checks and balances. QBE will still generate a net cash profit of around $850 million for the year which certainly isn’t too shabby. The stock is up 15% from its low, but is down over 30% from its mid-year high.

Foolish takeaway

Investors should be wary when jumping into stocks that have fallen a long way as they risk catching a ‘falling knife’. The three stocks above all have quality management teams, established businesses and the potential to deliver share price growth in 2014 if they can hit or beat profit targets.

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Motley Fool writer Andrew Mudie owns shares in QBE.

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