Four of the best recovery stocks: From alternative lenders to biotech, fund bosses highlight the unloved companies due for a stock market turnaround
Investing in a company that’s had a bad spell on the stock market can mean an opportunity to buy cheap shares. If a turnaround is successful, or the company proves its true potential to the market, those shares will one day be worth much more. I asked the experts which stocks they’re backing.
Illumina
From James Anderson, Scottish Mortgage Investment Trust
“If you ask me which company I think has the greatest possibility of changing the world and will make the greatest impact in 10 years’ time, I would say Illumina,” says Anderson.
Illumina is the world’s largest DNA sequencing company and, through its subsidiary Grail, it’s developing blood tests to detect cancer before symptoms arrive – otherwise known as a “liquid biopsy”. The test should cost less than $1,000 and is expected to be on the market in 2019. Grail has raised more than $100m from investors including Bill Gates.
But there is often poor sentiment towards biotechnology stocks. Their technology is yet to be proved marketable in the real world and their products can take a long time to be widely adopted. But short-term bad news for Illumina’s share price shouldn’t detract from the company’s potential to change the world.
“The fact that it is deeply out of favour with investors at the moment does not change that at all,” Anderson says.
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Plus500
From James Hanbury, Odey Asset Management
An Israeli company specialising in CFD trading, Plus500 has had a hard time in the last year. It was hit by a regulatory scandal, and although investors had loved the stock in the past, sentiment soured.
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“The shares fell dramatically. It’s a marmite stock and there were lots of bear routs,” says Hanbury.
However, Hanbury says this company is worth holding while it works through its issues and comes out the other side. It has a good deal of cash and has worked hard to move past the regulatory problem. It has bolstered its risk management team and, although currently “tarnished”, it should be able to ensure similar episodes don’t occur in future. It is good for income-seeking investors too, as it regularly returns 80-100 per cent of its earnings to shareholders.
Edenred
From Mark Page, Artemis European Opportunities fund
Edenred provides workplace benefits such as childcare vouchers for employers. Although it’s based in France, it does a large chunk of its business overseas, and its share price has fallen 40 per cent from its peak as investors have rushed to sell out of emerging markets.
“The majority of the company’s profits come from Latin America, which investors have left en masse,” Page says. He sees Edenred as a “victim of capital flight” and argues it has a resilient business model in an industry with “formidable” barriers to entry.
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“While investors wait for the macro-economic situation in Latin America to improve, shareholders in Edenred are paid a 5 per cent dividend,” he adds.
Lending Club
From Tom Slater, Baillie Gifford American fund
Alternative lenders are stepping in to fill the gap left by the big banks, which even years after the financial crisis remain reluctant to lend at good rates.
“I’m incredibly bullish about the outlook for these companies to take market share from banks,” says Slater. “There are lots of areas of financial services where consumers end up paying more than they should do for products. It creates a space for companies which can do things more efficiently to take market share.”
Consumers are only interested in interest rates, argues Slater, and are sick of the rates on offer at the incumbents.
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Not only are they attractive to consumers seeking credit, but newcomers have nifty, sleeker business models than banking’s incumbents.”Lending Club has much lower costs. It doesn’t have a branch network to support, for example.”
The only catch is the share price has been dreadful. “The company listed 18 months ago and its shares have been on a long road down ever since,” Slater adds. It reflects uncertainty over how these kinds of lenders can operate in an environment of rising interest rates, and about the underlying credit quality of the consumers using the lender.
“I feel very sanguine about those things as the business came through the cycle in 2008-9 very well. It was at a smaller scale then, but it was sufficiently large to show what happens.”