Five of the Best: UK turnaround stories

Old Mutual Asset Managers' Richard Watts highlights five UK stocks he is backing to benefit from self-help despite the tough economic conditions they face.

Watts, manager of the £947m Old Mutual UK Select Mid 250 fund, said there are a number of strong ‘self-help' stories among companies in UK domestic sectors which are generating strong growth and which should not be overlooked in favour of global alternatives.

Paragon Group

A business that commanded a sizeable share of the buy-to-let mortgage market in its heyday via subsidiary Paragon Mortgages, it was forced to withdraw from the market as a result of the credit crunch.

However, it has restored its cashflows and established a £200m credit facility to back re-entry. Paragon has substantial cash on its balance sheet, affording opportunities to buy the loan books of lenders seeking to de-leverage by selling off assets.

It has retained its infrastructure and is now is in a strong position to gain significant market share in a sector which is relatively uncompetitive, with shares trading at a discount to net asset value, in our view.

Capital & Counties

Capital & Counties Properties (CapCo) has a significant portfolio of high value properties in west London and the West End. Commercial property has been slow to recover from the downturn as a whole, but the CapCo portfolio is concentrated in areas where demand is rising significantly, providing a boost to rental growth.

The company is also repositioning its Covent Garden portfolio towards companies such as Apple and Burberry, further helping to raise both rents and capital values.

There is substantial potential for an increase in the value of the company's assets.

Barratt Developments

As the UK housing market gradually stabilises, Barratt stands out as the housebuilder most likely to improve shareholder returns. It has its costs under control and recently secured its balance sheet with a £1bn financing facility.

As house prices stabilise, the company will be able to increase margins by bringing to market houses built on land bought cheaply at post-recession prices. Barratt's shares trade at around 0.5 times the company's book value. As its trading position improves, we expect that to rise.

Punch Taverns

Having struggled for some years, Punch Taverns announced a strategic review under a new chief executive in October last year. As a result, the company is demerging its managed and leased operations and disposing of a large number of properties.

This will help make apparent the significant value within the business, especially in the managed estate, which has suffered from under-investment - something the group is now addressing.

Although it is early days, the company's recent trading results have been strong and ahead of its key competitors.

St James's Place

St James's Place has attractive long-term structural growth dynamics. It is a play on the fact people have to save more for their retirement and this is a pressure which will only continue to increase.

The dynamic for structural growth is there, and looking at the current valuation, we see St James' Place trading at a substantial discount to embedded value. The two characteristics make it an attractive proposition.