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I’ve been hunting for UK stocks that could be set for a big turnaround. Not necessarily on the scale of a Rolls-Royce — up 870% in three years! — but still a potentially market-thrashing return over the next three to five years.
Here are two potential turnaround stocks that have piqued my interest. I think both are worth considering.
FTSE 100
First up, we have Smith & Nephew (LSE: SN.) from the FTSE 100. This healthcare stock has been on a bit of a run recently — up around 15% in six months — but at 1,062p is still well off its 2019 price of 1,900p.
Smith & Nephew specialises in joint replacement technology and surgical devices. In recent years, it has struggled with inflationary pressures, supply chain disruptions, and changes in China’s procurement policies that led to lower prices for its medical devices.
In response to falling profits, CEO Deepak Nath introduced a plan in mid-2022 aimed at transforming the company’s operations. This focused on improving efficiency and launching new products to accelerate growth.
We’re slowly starting to see this bear fruit. For the full year, the firm expects to post 5% underlying revenue growth, equivalent to a total of roughly $6.1bn, with a 19%-20% trading profit margin.
Earnings per share are expected to grow at a compound annual growth rate (CAGR) of approximately 10.6% through to 2028. That would see the price-to-earnings (P/E) ratio fall to around 10 by then. Throw in the 3% forward dividend yield, and there appears to be a lot of value on offer here.
As for things that could go wrong, the company expects to take a $15m-$20m hit this year due to tariffs. The global trade situation creates a fair bit of uncertainty here. But management is confident that it can navigate these risks and still deliver its full-year guidance.
A rapidly ageing global population should lead to higher demand for hip and knee replacements, a core part of Smith & Nephew’s orthopaedics division.
FTSE 250
The second stock that I think could be set for a big turnaround is Genus (LSE: GNS). Shares of the FTSE 250 animal genetics company jumped 25% last week, but they still remain 67% lower than a peak reached in August 2021.
The reason I’m bullish here is because the US Food and Drug Administration (FDA) has just approved its PRRS Resistant Pig (PRS) programme for use in the food chain. PRRS is a disease affecting swine, costing the global pork industry billions.
Genus has edited a gene to make pigs resistant to most strains of the disease. And this FDA approval marks the first time genetically edited livestock has been cleared for commercial sale in America.
Now, it should be noted that PRS isn’t expected to make much difference to Genus finances till 2027. A lot can go wrong in the meantime, including further global trade disruptions and an economic slowdown.
Meanwhile, the stock is hardly cheap, trading on a premium P/E multiple of 24. That’s significantly higher than the FTSE 250 average.
Nevertheless, this FDA approval could be transformational for the company’s growth over the next few years, especially if the world’s largest pork producer (China) also approves the programme.
With the stock still down 67% since mid-2021, this recovery might be just getting started.
