5 More Turnaround Stocks

Everyone loves a great comeback story. And in the stock market, few things are more enjoyable than owning a stock on the cusp of its own massive turnaround. After all, many fortunes are made by the investors who succeed in buying great businesses:

1. during times of maximum pessimism,
2. while they're being ignored and forgotten, or
3. when they're being beat down to bargain-basement levels.

Meet the turnaround tycoons
Those investors are able to do so because they see what other investors don't. More importantly, they're willing to bet big on the stocks they're certain will experience a reversal of fortune. The names behind this strategy include Buffett, Templeton, Price, and many more.

We probably can't help you with your contrarian spirit, but here are five possible turnaround ideas from our Motley Fool CAPS community. These are stocks that, despite being down more than 20% over the past year, have received a five-star from our pool of individual and professional investors.

So, without further ado:

Just a word of caution: These stocks have been beaten down for very specific reasons. So, don't view them as formal picks but rather as suggestions you might want to investigate further. Due diligence is always required -- especially when you're playing with tricky turnarounds.

With that said, WebSideStory caught my eye as an interesting (possible) comeback story.

Slide from the Upper West Side
WebSideStory might have a shot at Broadway, but over the last couple of years, the Web traffic specialist has been a stinker on Wall Street. Despite awesome sales growth -- like the 57% surge posted in the fourth quarter -- WebSide has largely been a disappointment for investors. Behind continued net losses and rapidly declining margins, the stock seems to be stuck in a rut. Still, our CAPS community believes a rebound is in order.

As fellow Fool Rich Smith highlighted a few weeks ago, most of the pressure on WebSide's margins are of the "non-cash" sort. Specifically, huge depreciation charges and stock-based compensation expense have weighed heavily on WebSide's GAAP performance. But in terms of free cash flow generation, WebSide is on the right side of things, consistently posting Cash King margins in the double-digit range. And as Fools know, cash is what counts.

Also, with a rapidly growing client list -- which includes the likes of General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ), and even Google's YouTube -- it would be reasonable to expect prolonged growth from WebSide going forward. With online video only rising in popularity, WebSide lives in a nice part of town to benefit.

WebSide is expected to grow earnings at a 35% clip for each of the next five years. As Foolish investors, it's always best to take these specific projections with a grain of salt. Still, with a PEG of 0.50, growing cash flows, and a healthy balance sheet to boot, even the Jets and the Sharks would agree that the stock isn't very expensive.

These three CAPS players tell their own WebSide of the story:

• CAPS All-Star Ganndalf also loves the client roster and says, "Best Buy, Bank of America, YouTube, Federal Express, Bloomingdales, yada yada yada, these are just a few of the more than 1500 business that use Websidestory's services.... E-businesses need these guys if they want to maximize & optimize their website's role in building their business."
• The Fool's own Zahrim weighs in with a prediction: "Growing like gangbusters, with a fairly strong balance sheet for such a small company.... If WebSideStory keeps executing like this under new management, there is no reason why it shouldn't be a billion-dollar cap in five years, which would represent about 35% CAGR. I'll take that."
• Meanwhile, tverke talks competitive advantage: "WebSideStory has set itself apart as an innovator and market leader through its pioneering suite of applications; its open platform and suite of APIs; its growing ecosystem of partners; and its business optimization services. Expect accelerating growth in the near future."

Now, its your turn(around)
So what do you think, Fool? Will there be a happy ending for WebSideStory investors? Or will it end up in tragedy?

The great thing about turnarounds is that they offer an exceptional way to generate excess returns over the market. The catch, of course, is that they require an excess amount of time and effort to figure out. But, with the help of more than 25,000 fellow Fools in our community, you'll have a head start on spotting some of the more probable plays. So, click here to get started, absolutely free.

More tasty, terrific, and (hopefully) triumphant turnaround treats await.

For more CAPS-related fun:

• Contrarian Shopping List
• Wall Street's Wish List
• Shrink! The Latest Buyback Announcements

Foolish contributor Brian Pacampara holds no position in any of the companies mentioned. Best Buy and FedEx are Motley Fool Stock Advisor picks. Bank of America and Johnson & Johnson are Income Investor choices. The Fool's disclosure policy is always headed in the right direction.