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2 Top Turnaround Stocks to Buy Now

By Zhiyuan Sun - Updated May 5, 2021 at 9:56AM

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These two battered stocks have reignited investors' passion over the past year. Can their momentum last?

Video game retailer GameStop (GME 8.57%) and biopharma Bausch Health Companies (BHC 4.47%) are two companies that have realigned themselves on the path to growth -- after straying away for too long. Shares of the two companies are up 2,790% and 82%, respectively, over the last 12 months. 

What's more, both companies have attracted substantial institutional interest. Ryan Cohen, the former co-founder of Chewy, is looking to personally steer GameStop's turnaround after acquiring a 13% stake in the company. Meanwhile, billionaire hedge fund manager Carl Icahn recently purchased 7.83% of Bausch Health's shares outstanding. Here's how the two businesses could persevere going forward.

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1. GameStop

It was obvious from the beginning what the iconic video game retailer needed for a comeback: close unprofitable stores, invest in e-commerce, and overhaul its outdated customer services. 

The problem was that nobody believed in its potential. Lenders thought the company was on the brink of extinction and stayed well away from it. Due to intense short-selling activities, its share price also remained low enough to make equity financing impossible. 

That all changed after a legendary short squeeze sent its stock soaring. Thanks to the boost from retail traders, GameStop raised $551 million in much needed cash by selling just 3.5 million units (about 4% of the company). A year ago, it would have fetched just $13.2 million by selling that same amount of stock.

With the cash boost, it was able to eliminate its long-term debt. Now, GameStop is capitalized for growth. Last year, the company's e-commerce segment improved by a stunning 191% year after year. Online sales of its consoles, accessories, toys, video games, and collectibles now account for 30% of its total $5.09 billion in revenue.

The best part about GameStop is its valuation. Despite an impressive run-up, the stock is trading for only 2.26 times revenue. Retail stocks typically trade between 0.8 times to 4.5 times sales, depending on their e-commerce exposure, so there is definitely room to make money if it completes its digital transformation.

2. Bausch Health Companies 

Bausch Health Companies is a pharma conglomerate with a dark history. Formerly known as Valeant Pharmaceuticals, the company began a streak of leveraged acquisitions in the early 2010s. It took on vast piles of debt, acquired a competitor, laid off that company's staff and raised its drug prices, and moved on to the next while its profit margins soared. Its house of cards came crashing down in 2015 after an accounting scandal and political outrage from its price-gouging practices, which caused drug prices to fall.

Now, Bausch Health consists of a combination of contact lens manufacturer and eye care company Bausch + Lomb, gastrointestinal drug company Salix Pharmaceuticals, and various dermatology subsidiaries. The company is $24.1 billion in debt and generating just $1.428 billion a year in earnings.

Bausch Health has severe trouble competing with other pharma companies. More than $15 billion of its $8 billion in annual revenue goes to paying interest alone. The firm has just $452 million to spend on the research and development (R&D) of new drugs every year. 

It is a miracle that the company is still alive to this day. But, despite a series of poor choices, the then CEO of Valeant Pharmaceuticals, Michael Pearson, did make one smart decision: the acquisition of Bausch + Lomb in 2013 for $8.7 billion. Due to the rising popularity of its contact lenses, Bloomberg Intelligence now estimates the subsidiary's value to be between $20 billion to $30 billion.

Right now, Bausch Health is looking to unload its Bausch + Lomb subsidiary. If it finds a buyer anywhere near that price, it could eliminate its debt load and start fresh. It is also keeping a spinoff of Bausch + Lomb on the table from its core pharma business to separate its liabilities.

Trading at 1.45 times sales and 14.5 times free cash flow, Bausch could be a buy if it can emerge from debt and chart a growth path forward. For now, the company still makes enough money to service its interest and refinance when debt principles come due. It is a bargain compared to the average pharma stock's five times revenue and 123 times earnings valuation.

Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bausch Health Companies. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$43.45 (8.57%) $3.43
Bausch Health Companies Inc. Stock Quote
Bausch Health Companies Inc.
BHC
$5.84 (4.47%) $0.25
Chewy, Inc. Stock Quote
Chewy, Inc.
CHWY
$47.71 (7.36%) $3.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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