One of the most exciting aspects of being an investor is buying shares in companies that are set to post improved returns. Certainly, buying a slice of a company that is already performing well and which continues to do so can be very rewarding. But, taking additional risk with a business that has a relatively weak track record, or is delivering better performance than expected, can equate to significantly higher capital gains.
A prime example of a company which is set to record a substantial turnaround in its fortunes is telecoms business Vodafone (LSE: VOD). In recent years it has struggled to a large degree with the exposure of its business being weighted towards Europe. As a result, its bottom line has been very disappointing, with it falling in each of the last two years and being expected to decline in the current year, too, as Europe continues to struggle economically.
However, with the onset of quantitative easing in Europe and a Central Bank which is now apparently willing to throw whatever is necessary at the single-currency region so as to stimulate its economic performance, Vodafone is forecast to perform far better next year. In fact, its bottom line is due to rise by 20% and this has the potential to lift investor sentiment, thereby pushing the company’s share price higher. And, with interest rates due to remain low across the Eurozone and in the UK, its yield of 5.2% is likely to appeal to income-seeking investors over the medium to long term.
Similarly, department store Debenhams (LSE: DEB) has also endured a tough few years. It has been a victim of the squeeze on disposable incomes which has been a major feature of the landscape for retailers in recent years, with shoppers being much more price conscious than in the past. Therefore, Debenhams has not only lost customers to lower priced rivals, but has attempted to invest in pricing, thereby causing margins to come under pressure. The result has been a drop in its net profit of 25% in the last two years.
However, with disposable incomes now increasing in real terms for the first time since the start of the credit crunch, Debenhams’ financial performance is set to improve. While a 4% rise in earnings next year may not sound like a great result, it would signify a step-change in Debenhams’ fortunes and could lead to improved sentiment. And, with Debenhams trading on a price to earnings (P/E) ratio of just 10.3, there is vast scope for a rating expansion over the medium term.
Meanwhile, staffing specialist SThree (LSE: STHR) endured a challenging period between 2012 and 2013, where its bottom line collapsed by around 45%. However, with its earnings rising by 79% last year and being expected to post double-digit increases in each of the next two years, it appears to be well on its way to impressive share price performance.
In fact, its shares are already up by 25% this year and, with the company today reporting that its full-year performance is likely to be ahead of expectations, it is likely to continue the strong momentum of the last few months. There is certainly scope for further share price rises, since SThree trades on a price to earnings growth (PEG) ratio of just 0.6, which indicates that it offers growth at a very reasonable price.