Overcoming disappointments can be tough. For companies, a period of losses, underperformance or a losing streak in its share price can be difficult to beat. For example, the business may need to be restructured, personnel may need to be replaced and, of course, it takes time for investors to come around to the idea that the company in question could become a winning share.
However, buying stocks that have disappointed in the past for whatever reason can be a sound move for long-term investors. Certainly, it can take time for them to come good and, of course, there is a risk that they will not. But, some of the time the risk is well worth it when the potential reward is taken into account.
For example, Coca-Cola Amatil Ltd (ASX: CCL) has endured a very challenging period. Its financial performance has been poor and, in the last five years, its bottom line has fallen at an annualised rate of 4%. As a result, its shares have slumped by 27% during the same period.
However, after a period of restructuring which saw the company cut costs, become more efficient and launch a marketing drive into the Asian region, Coca-Cola Amatil appears to be a very different proposition to that of just a couple of years ago. In fact, the company's management team is confident that poor financial performance is now behind it and, looking ahead, Coca-Cola Amatil is forecast to raise earnings by almost 5% per annum during the next two years. This could catalyse investor sentiment and lead to an increase in its price to sales (P/S) ratio of 1.32, which is currently in-line with that of the ASX.
Similarly, Commonwealth Bank of Australia (ASX: CBA) has posted a share price decline of 14% since the turn of the year, which is considerably worse than the ASX's fall of 7% during the same time period. Part of the reason for this has been poor profit growth, with CBA's earnings rising by just 1.1% in its most recent financial year. Additionally, the raising of $5.1bn to satisfy regulatory requirements has also impacted on investor sentiment and caused doubts surrounding future dividend rises.
However, CBA continues to offer strong bottom line growth potential. For example, its earnings are forecast to rise by over 6% per annum during the next two years and, with dividends being expected to increase by 3.7% during the same period, they are likely to grow ahead of inflation. As such, CBA's price to earnings (P/E) ratio of 13.6 has considerable appeal while the ASX trades on a P/E ratio of 14.9.
Meanwhile, global contractor, Cimic Group Ltd (ASX: CIM), has endured a very difficult period. For example, its bottom line has come under severe pressure in recent years and, in the financial year 2014, the company went into loss-making territory with regard to its continuing operations. As such, its share price severely underperformed the ASX between 2012 and 2015, with it rising by just 18% versus 33% for the wider index.
However, this year has seen a step change in investor sentiment toward Cimic. Its shares have outperformed the ASX by 8% year-to-date and the company is forecast to make a profit in the current financial year. Furthermore, profits are due to rise by around 4.5% next year, which means that Cimic's dividend should be covered 1.7 times by profit. So, while it has disappointed in the past, improved financial performance could positively catalyse investor sentiment and allow Cimic to post strong total returns over the medium to long term.
