While a number of UK-focused stocks may be struggling due to the uncertainties created by Brexit, not all global stocks are performing well, either.
In general, their valuations may have benefited from weaker sterling since the EU referendum, as well as continued strong economic growth in the developing and developed world. However, there remain a number of stocks that have fallen in value in recent months and which could offer turnaround potential.
Falling share prices
Two consumer goods companies that could fall into that category are Burberry (LSE:BRBY) and British American Tobacco (LSE:BATS). The former’s share price has moved 6% lower in the last six months, while the latter’s is down 5%.
In the case of Burberry, its shares may have fallen because of its current shift in strategy. Under a new management team, the company is seeking to develop its luxury offering. This entails store closures as well as an increase in capital expenditure in order to refurbish existing stores. With change often comes uncertainty, and investors appear to have responded with caution to the new strategy.
British American Tobacco’s stock price may have been negatively impacted by the potential for new regulations in the US. The FDA is potentially seeking to reduce the amount of nicotine in cigarettes, which could severely hurt the company’s earnings. Additionally, investors now seem to be more focused on cyclical growth stocks rather than on defensive tobacco shares.
Global growth potential
Both stocks have exposure to a plethora of global markets that could offer high growth potential in the long run. For instance, Burberry has a strong position in China and a number of other emerging markets. With wage levels continuing to rise and demand for higher-end consumer goods doing likewise, there could be a growth opportunity on offer.
The company appears to have significant pricing power, and this could be increased as it transitions to a focus on higher-end products as part of its new luxury strategy. Although investment in its new plan may be high over the medium term, with capex of as much as £160 million being expected in 2019, cost savings and a greater focus on efficiencies may help to offset this to some degree.
Similarly, British American Tobacco continues to invest heavily in next generation products. This is an area which is moving at a fast pace, with e-cigarettes having the potential to be usurped by other technologies such as heated tobacco. British American Tobacco anticipates that the reduced risk products market could account for £5 billion of its sales per annum by 2022. Therefore, even if cigarette sales come under further pressure, there seems to be a clear avenue for future growth.
Neither stock has a particularly low P/E at the moment. British American Tobacco’s P/E is 17.7, while Burberry’s is 20.6. However, both figures could move higher if the two companies are able to deliver on their growth strategies. Although turnaround stocks can be risky, in both cases strong brands, global reach and sound plans through which to generate future returns could make their risk/reward ratios appealing.
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