3 Turnaround Stocks in the Early Innings With More Upside to Come

Key Points

• Stock prices tend to react in advance of a turnaround taking shape.
• A new CEO, new products, revitalized branding, removal of litigation clouds, or mind-bogglingly cheap valuations can all lend to a sentiment reversal preceding a turnaround.
• Turnaround stocks tend to be “cheap” but don't stay cheap for long.

“Turnaround” is a magic word for investors looking to get into a stock at cheap valuations. It’s a key justification for entering stocks that have been left for dead. It's also a term that gets overused to the point where it's lost its value. The stock market is forward-thinking, and companies that are “turning around” tend to see their stocks bounce first and ask questions later. Here are three stocks that are in turnaround situations with more upside potential when it comes to fruition.

Gap: Lagging Retail Apparel Playing Gaining Turnaround Momentum

With high inflation constraining consumer budgets, the consumer discretionary sector has had a tough time separating tight-fisted dollars from shoppers. Retail apparel has struggled the worst, as evidenced by the weakness in retail apparel stocks in 2024. However, Gap Inc. NYSE: GAP may be a notable exception. The company operates four brands: Gap, Old Navy, Banana Republic and Athleta. The company is seeing stabilization in its legacy brands, notably Gap and Old Navy, which used to be the main growth driver. These two brands account for nearly 80% of total revenue. Athleta has stepped up as a growth driver, delivering the highest YoY comps at 5%. The signs of a turnaround revealed itself in its Q3 2024 earnings report, ahead of its holiday shopping season.

The “Quiet” Q3 Turnaround and Raised FY 2024 Forecasts

Gap reported Q3 2024 EPS of 72 cents, beating consensus estimates by 14 cents. Revenues inched up 1.6% YoY to $3.83 billion, beating $3.81 billion consensus analyst estimates. Consolidated same-store sales (SSS) comps rose 1%, but at least they were positive. However, taking a look under the hood at comps revealed where the turnaround was happening:

• Old Navy comps were flat at $2.2 billion, and sales were up 1% YoY.
• Gap comps rose 3% to $899 million, and sales went up 1% YoY.
• Banana Republic comes fell 1% to $469 million, but sales rose 2% YoY.
• Athleta comps rose 5% to $290 million, and sales rose 4% YoY.

Gap closed the quarter with $2.3 billion in cash, up 64% YoY. Inventory fell 2% YoY to $2.33 billion. CapEx was $330 million. Gap issued upside guidance for the full year for revenue of $15.11 billion to $15.19 billion versus $14.95 billion consensus. FY24 gross margin is expected to rise to 220 bps from 200 bps prior guidance.

Argus Upgrade on Turnaround

On January 21, 2025, Argus upgraded shares of GAP to a Buy. Analyst Christine Dooley commented, “In 3Q, Gap topped consensus estimates, gained market share across its brands, and grew overall net sales for the fourth consecutive quarter. It also achieved its highest operating margin in seven years. Management is guiding higher for FY25 earnings and expects margin improvement.”

Dolley continued, “We think the management team has done a good job of revitalizing the brands over the past few years and are forecasting earnings growth over the next several quarters. Based on the valuation and the company's consistent pattern of growth and widening of margins, we believe that the shares are attractively valued and that a Buy rating is now appropriate. Our 12-month target price is $27." GAP shares trade at 12.22x forward earnings and have a 2.43% dividend yield.

3M: New CEO, New Products and Cost Cutting Accelerates Turnaround

Upon first glance at Q4 2024 headline results for 3M Co. NYSE: MMM, the disappointing 25% YoY revenue decline doesn’t invoke a sense of turnaround. However, the drop was due to the spin-off of its healthcare unit, Solventum, last year.

Instead, a look at the organic sales reveals a 2.1% YoY rise driven by strength in its Safety and Industrial segment. This segment saw robust demand for roofing granules and industrial tapes and adhesives, marking a third consecutive quarter of solid growth.

L3Harris Pedigree CEO Leads the Organic Sales Back to Positive Territory

3M CEO William Brown came on board in May 2024, directly from being CEO and Chairman of defense contractor L3Harris Technologies Inc. NYSE: LHX. Brown prioritized innovation, which up to then had been constricted and stifled by lawsuits and litigation.

That was partially put behind them with a $6.1 billion settlement leading to a 32% gain in new product launches in 2024, which was the key driver of organic growth.

Brown was instrumental in swinging to positive growth in its Consumer segment as a rebound in the home improvement market helped drive up organic sales by 1.12% YoY.

Kohl’s: $8 Billion in Real Estate, P/E 6.4, 14.68% Dividend Yield at a $1.52B Market Cap??

This subheading is not a typo. Struggling retail department store chain Kohl’s Inc. NYSE: KSS is trading at a discount that brings tears to a value investor’s eyes. It’s hard to believe that just over two years ago, Kohl’s was fending off takeover bids offer between $53 to $60. Management felt shares were worth much, much more.

Fast forward to 2025, Kohl’s is on its third CEO in three years. Previous management struggled with a fatal strategic misstep doubling down on casual and athleisure during the post-pandemic re-opening, bloated inventory, heavy margin crippling promotions, and continued market share losses. The stock is trading at a price/book ratio of just 0.39, on a book value of $35.16. Kohl’s stock fell 49.12% in 2024.

A Toilet and Kitchen Sink Quarter

Kohl’s reported a downright nasty Q3 2024. It posted Q3 EPS of 20 cents missing consensus estimates by 8 cents. Revenues fell 8.5% YoY to $3.71 billion, missing $3.64 billion. Comp sales dropped 9.3% YoY. Gross margins fell 20 bps to 39.1%.

CEO #2 Steps Down Ushering in CEO #3 from Michaels Stores

CEO Tom Kingsbury commented, “We are not satisfied with our performance in 2024 and are taking aggressive action to reverse the sales declines. We must execute at a higher level and ensure we are putting the customer first in everything we do. We are approaching our financial outlook for the year more conservatively given the third quarter underperformance and our expectation for a highly competitive holiday season.”

Is the Third Time the Charm?

Kingsbury also announced his plans to step down as CEO to usher in Ashley Buchanan on January 15, 2025, as its new CEO. Buchanan was CEO of The Michaels Companies, a major arts and craft store chain, and formerly an executive at Walmart Inc. NYSE: WMT.

Investors are hoping the “third time’s the charm.” The mind-bogglingly low valuation already prices in a very low bar. Results of its holiday shopping season will be revealed in its Q4 2024 earnings release on March 14, 2025. Expectations have been cut dramatically, with revenue down 8.1% to $5.71 billion, EBITDA cut 22.6% to $486 million, and EPS estimates cut 54.2% to 76 cents.