Turnaround Stocks: 3 Hidden Gems to Watch 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

One of the most confusing topics in investing is that of turnaround stocks.

There are many investors who don't believe in investing in turnaround stocks. They don't like to come anywhere close to them.

And then there are investors who absolutely love these stocks. They argue that everyone should invest in turnaround stocks as they are immense wealth creators.

So, what is it? Should one invest in turnaround stocks or stay away from them?

Well, my own view on this is that there are 'good' turnaround stocks and then there are 'bad' turnaround stocks.

The 'good' turnaround stocks are companies with strong financial history, impressive return ratios and solid balance sheets.

It is just that they have run into problems that are short term in nature.

However, it is expected that the company would overcome these problems in a couple of years and get back on its long-term growth path.

Therefore, if such 'good' turnaround stocks are available at attractive valuations, one should certainly consider buying them and ride the turnaround.

Such stocks often create huge wealth for their shareholders in a short span of time and can make for very good investments.

The 'bad' turnaround stocks on the other hand, are bad quality companies that do not have sound financial history, have low return ratios and perhaps, also have a significant amount of debt on their balance sheets.

When such stocks are being touted by financial gurus and experts as turnaround candidates, one should really approach them with caution.

Yes, some of these stocks can turnaround and can go on to become huge multi baggers.

However, in my view, it is difficult to separate luck from skill in such turnaround stocks and this confusion can land you into serious trouble over the long term.

In investing, skill should play the primary role and luck, the secondary role.

If you allow luck to play the primary role, which usually happens in the case of 'bad' turnaround stocks, you are asking for trouble in my view.

Therefore, I would strongly advocate investing in 'good' turnaround stocks as opposed to the 'bad' ones.

Well, to make your job easier, I am going to talk about three 'good' turnaround stocks that you can keep on your watchlist.

KRBL Ltd, our first turnaround candidate, hasn't had a good last few quarters.

The company's profits were down by around 15% in FY24, which fell by another 56% during the June quarter on a YoY basis.

This has led to the company's share price falling by more than 25% in the last one year.

We believe that you can keep KRBL on your turnaround stock watchlist on account of the company's solid fundamentals and its good long-term prospects.

Incorporated in 1993, KRBL has grown multi-fold in terms of revenue and operations. The company has 14 rice brands under its banner. 'India Gate', which is the flagship brand of the company, is quite popular in the Indian and in international markets and derived 58% of its total revenue in FY24, indicating a strong market presence and acceptability.

'Unity' a low-priced basmati rice brand of the company also contributed 15% of total revenue in FY24.

KRBL has a strong presence in international markets and the Middle East countries, such as Saudi Arabia, the UAE, Kuwait, Qatar, Oman, and Bahrain, among others.

The Middle East region accounted for nearly 58% of KRBL's total export sales in FY24 (PY: 67%). The company is among the largest branded basmati rice player in these countries.

Besides, the company has an almost debt free balance sheet and regularly shares part of its profits with shareholders as dividends.

Hence, in view of the company's strong market position and its impressive track record, one can expect KRBL to stage a strong turnaround.

The second turnaround stock on the list is Bajaj Consumer Care Ltd.

The stock is down more than 20% from its 52-week highs of close to Rs 300 per share.

Part of the reason is company's mediocre performance of late.

Bajaj Consumer had last achieved a profit of more than Rs 200 crore back in FY21. It has been all downhill since then as the profits have now shrunk to Rs 150 crores on a trailing twelve-month basis.

Fundamentally, the company is certainly on a sound footing.

Bajaj Consumer is a market leader with its almond-drops hair oil commanding over 63% market share in the light hair oil segment as of March 2024.

The brand positioning of the hair oil is strengthened by high entry barrier given the strong brand loyalty among customers.

The company has a wide geographical presence and a distribution network covering more than 43 lakh retail outlets. Additionally, it is focused on increasing its share from non-almond drops hair oil products and has already launched almond drop extensions for haircare and skincare through launch of serums, shampoos, conditioners, soaps and body lotions.

It spends vigorously on advertising to increase its reach and has undertaken various initiatives to improve direct reach to consumers.

Strong brand recall of Bajaj further aids in retaining market dominance.

Expansion of the product portfolio (through Bajaj Almond extensions and Bajaj Ethnic range), strong distribution reach with focus on modern trade and e-commerce should support revenue growth over the medium term.

Valuations aren't very demanding either with the stock trading at a trailing twelve-month PE of 22x, quite close to its long-term average of around 23x.

Therefore, Bajaj Consumer is the second stock you can consider for your turnaround stocks watchlist.

The third turnaround stock that deserves to be on your watchlist is none other than Valiant Organics Ltd.

Established in 1984 as Valiant Chemical Corporation and then later changed to Valiant Organics Limited (VOL) in 2005, the company is engaged in the business of manufacturing specialty chemicals.

VOL's promoters have been engaged in the chemical intermediates business for over three decades which has enabled them to develop strong understanding of market dynamics and establish healthy relations with customers and suppliers.

VOL has a diversified business profile with diversity at product, geography, customer and end-use industry level.

The company's share price performance in the last one year hasn't been great though. The price is down almost 20% in the last one year, driven by poor financial performance.

The company incurred a small loss in FY24. However, as you can see, it has done well in the previous years, earnings a profit of Rs 120 crores on a consistent basis.

In terms of the balance sheet strength, it is quite strong with the overall debt being much lower than equity.

As highlighted by the company's MD in a conference call few months ago, there has been significant pressure across the board due to various factors related to global slowdown, mainly in Europe. Plus, there is also the problem of China dumping.

Hence, it expected FY24 to be a stabilising year. However, things should start looking better FY25 onwards as the market rationalises and new products come on stream.

And as revenues and profits improve, the share price should also follow suit.

So, Valiant Organics is the third turnaround stock that you should keep on your watchlist.

Please note that these stocks are not recommendations from our side and investors are requested to do their own research and due diligence before investing in them.

The common feature amongst these three stocks is that these are what I call as 'Heads I win, Tails I don't lose much' turnaround stocks.

Put differently, while the downside from here may not be much, there could be a good upside for the taking if the operational performances of these stocks turn around.

Also, such stocks are usually meant to be held for 1-2 years where you make a quick upside of 50%-100% and then exit. These are not your typical buy and hold stocks.

So, with these caveats out of the way, I'd like to end today's session here. I will see you again in the next session, good bye and happy investing.