Why these 3 ASX shares deserve a second chance

Credit: Bill Dan

As investors, it can be tough to look beyond the disappointment of the past.

But companies can change, as can their outlook. Whether it be due to a new management team, or a changing economic environment, or perhaps a revised business strategy, here are three ASX businesses that are worthy of a second chance:

Woolworths Limited (ASX: WOW) has gone backwards in recent years due to its fixation on margins. It tried to maintain higher prices than its rivals such as Coles and Aldi but, as a result, customers have turned away in droves. What’s more, the company’s attempt to compete with the Wesfarmers Ltd (ASX: WES) owned Bunnings Warehouse through its Masters Home Improvement venture proved to be a huge failure, resulting in enormous losses for the business.

However, Woolworths has had a change at the top with a new management team now trying to right the wrongs of the old. It is closing its Masters chain, which should help stem the losses, while it is also pumping money into reducing prices on the shelves. This will have a negative impact on margins and could well exacerbate any losses in the near-term, but should help the company become relevant again in the long-run.

I wouldn’t buy shares of Woolworths just yet, but they are worth keeping on a long-term watchlist.

Coca-Cola Amatil Ltd (ASX: CCL) is another company that was once adored by investors as the bottler of Coca-Cola products in the South Pacific region. Unfortunately, that label has worn off with investors now concerned about the strength of the Coca-Cola brand.

To begin with, consumers are increasingly turning towards rival products that cost less, including Pepsi, which gives the impression that Coca-Cola can no longer charge such a premium for its brand. Changing consumer health trends could also threaten the company’s long-term potential, as could its ongoing investment in the Indonesian market which has thus far proven to be a drain on the company’s resources.

In saying that, the group has cut costs throughout the business and is aiming for mid-single-digit earnings growth in the near future. The company still has a lot of work to do before I’d look at buying shares again. However, like Woolworths, I’m keeping the shares on my long-term watchlist, waiting to see whether the efficiency improvements can help make Coca-Cola Amatil great again.

Prophecy International Holdings Limited (ASX: PRO) attracts far less attention than Woolworths and Coca-Cola Amatil due to its smaller size. To small-cap investors, however, Prophecy had become a very popular business with its shares rising as much as 469% between January 2015 and November 2016.

The company owns the SNARE security software as well as eMite business analytics software, with SNARE in particular generating huge growth for the business. While the shares hit a high of $2.53, they have since fallen to just $1.17. The latest setback was due to a downgrade to its revenue and profit guidance for the year.

Indeed, investors are right to be cautious of a business that is reporting slowing growth when it is meant to be in its prime. However, the company noted that the downgrade was a timing-related issue, which could mean the long-term picture remains intact. I’m waiting on the sidelines for now, but believe it’s too early to write the business off for good just yet.

While it may be a little too early to jump on these shares, there are plenty of others that deserve your attention today. The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia owns shares of Prophecy International Holdings Ltd.. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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