There can be times where a fundamentally strong business faces financial headwinds. This can be in the form of margin contraction or revenue de-growth. With the markets tending to overreact, stocks of these companies generally trade at a valuation gap. However, when fundamentals improve, these turnaround stocks can deliver robust returns in quick time.
Short or long-term investing in turnaround stories is one of the most successful investment strategies. Of course, the investment should be at a time when there are early signs of reversal. That’s when there is ample juice in the impending rally.
I must add that there are potential industry catalysts that need to play-out for further strengthening the buy thesis. However, even if that’s left aside, the stories discussed represent stocks trading at a considerable valuation gap and a strong rally is likely.
Let’s discuss the reasons to be bullish on these turnaround stocks to buy.
MakeMyTrip (MMYT)
The travel and tourism sector took a massive hit during the pandemic. With the sector on a recovery mode, there are some attractive stories to consider. MakeMyTrip (NASDAQ:MMYT) stock is among the top turnaround stocks that seems poised for a big breakout.
As an overview, MakeMyTrip is among the largest online travel solutions company in India. With a swelling middle-class, there is little doubt on the long-term growth story. The company seems well positioned to benefit.
In the coming quarters, the reason to be bullish is as follows. MakeMyTrip reported an operating loss of $18 million for financial year 2021. With strong growth in gross bookings acting as a catalyst, MakeMyTrip reported it’s highest ever operating profit of $70.3 million for FY2023.
This seems to be the beginning of the turnaround story with government policies focused on boosting travel and tourism. MMYT stock has remained sideways for the last 12 months. A big rally seems imminent as financials continue to improve.
Cronos Group (CRON)
Cronos Group (NASDAQ:CRON) is a massively undervalued stock with upside potential. Even as regulatory headwinds related to the cannabis sector sustain, I am bullish on CRON for multiple reasons.
First, Cronos ended Q1 2023 with cash and equivalents of $836 million. With a robust cash buffer, the company is best positioned to capitalize on the impending growth opportunity once regulatory headwinds wane.
Further, Cronos is a turnaround story from a financial perspective. The company has been focused on cost cutting and this explains the exit from U.S. hemp business. Cronos expects to deliver positive cash flow in 2024. As cash flows accelerate, valuations are likely to adjust on the upside.
I also like the fact that Cronos is focused on recreational as well as research-backed medicinal cannabis. The total addressable market is significant and the best part of growth is still to come for the company.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) is another attractive stock with upside potential. In the last 12 months, the stock has trended higher by 10%. Considering a forward P/E of 13.4, a breakout on the upside seems imminent.
Borr Drilling is a turnaround story from the perspective of revenue and EBITDA margin expansion. Last year, Borr reported revenue and EBITDA of $443.8 million and $157.4 million respectively. This implied an EBITDA margin of 35.5%.
The company’s order intake has been strong in the last 12 to 18 months. Currently, the provider of jack-up rigs has an order backlog of $1.64 billion. The key point to note is that Borr expects revenue and EBITDA growth of 71% and 141% respectively for 2023. The EBITDA margin guidance is at 50%. Therefore, with massive upside in revenue and margin, BORR stock looks attractive.
Relatively depressed oil price is the reason for BORR stock remaining subdued. However, with production cuts and geopolitical tensions, I don’t see further correction in crude. Once there is a renewed rally in oil, the stock will skyrocket.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.