In the stock market, few things are more profitable than finding a stock on the cusp of a 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 beaten down to bargain-basement levels.
Meet the turnaround tycoons
And 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 rating (the highest) from our pool of individual and professional investors.
So, without further ado:
|
Company
|
One-Year Return (as of 03/06 close)
|
CAPS Bulls
|
CAPS Bears
|
|
Global Payments (NYSE: GPN)
|
(27.44%)
|
87
|
3
|
|
Arthrocare (Nasdaq: ARTC)
|
(23.36%)
|
30
|
0
|
|
Braskem (NYSE: BAK)
|
(22.87%)
|
99
|
4
|
|
Corning (NYSE: GLW)
|
(22.76%)
|
855
|
35
|
|
Rowan Companies (NYSE: RDC)
|
(22.39%)
|
114
|
5
|
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.
That said, Global Payments caught my eye as an interesting (possible) comeback story.
As the globe turns?
Global Payments, a high-volume processor of electronic transactions, doesn't represent a typical turnaround bet on a struggling business. In fact, the company is doing brilliantly. Earlier in the year, Global Payments reported nearly 19% growth in both earnings and revenues, while free cash flow -- which consistently represents about 20% of GPN's sales -- was as healthy as ever.
Nevertheless, the results failed to meet Wall Street's expectations, breaking a four-year streak of surpassing analyst estimates. Mr. Market gave Global's shares a 20% haircut for the disappointment, and the stock has yet to recover. Our CAPS community, however, believes the business represents an attractive opportunity at these levels.
At one point or another, everyone has felt the frustration of not being able to purchase something from a smaller store that doesn't accept credit cards. Well, GPN specializes in efficiently processing electronic payments for these smaller vendors, giving them a relatively low-cost way to accept plastic. GPN's nicely cultivated niche in this area is what makes the company unique. And in a U.S. market estimated to process $7.4 trillion of electronic transactions in 2008, owning even a "small" advantage should translate into huge growth.
Global going global
So, as management looks to penetrate existing markets while it expands into new areas (such as Latin America, the Czech Republic, and the Asia-Pacific region), many of our players feel Global Payments will continue to generate well-protected cash flow going forward. You can never figure out exactly when and how growing, and sustained, cash-flow generation will be reflected into a stock's price, but our CAPS community believes it's just a matter of time.
With regards to the pummeling that Global Payments took in January, CAPS all-star pennysplants offers a well-processed explanation:
"Taking advantage of what I think is an over-reaction. Agreed, this is a 'story stock' around which investors/analysts tend to act like "groupies". Over the medium term, GPN will outperform the S&P. Note to self: Hang Tight. This is a cash machine with strong fundamentals. And, at this price, worth a slot in my CAPS portfolio."
Now, its your turn(around)
So what do you think, Fool? Will Global Payments finally begin processing with investors? Or will it keep postponing its payments? 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 nearly 24,000 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:
Foolish contributor Brian Pacampara holds no position in any of the companies mentioned. The Fool's disclosure policy is always headed in the right direction.
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