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:

• During times of maximum pessimism.
• While they're being ignored and forgotten.
• 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 four- or five-star rating 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, Aspreva Pharmaceuticals caught my eye as an interesting (possible) comeback story.   

Aspreva's leading indicators
I just love a stock where all of its different scenarios -- along with the potential payoffs of each outcome -- can be laid out to analyze. It's a difficult task to come up with a risk/reward profile for most investments, but in the case of Aspreva Pharmaceuticals, I think our CAPS community has got it pegged: At current prices, the potential rewards outweigh the risk of loss by a wide margin.

If you're not familiar with Aspreva, it's a stock that my friend Brian Lawler and founding Fool David Gardner started following over a year ago on CAPS. Since then, Aspreva has received a lot of attention from our community, with 770 CAPS players making an outperform call on the stock (only nine players are bears). So, what's all the excitement about? Well, it's pretty simple.

Aspreva is a cash-rich ($277 million in cash and cash equivalents), highly profitable (ROE of 45%), and relatively underfollowed biotech, which also happens to be trading at a dirt cheap price (a P/E of 6.2 and an EV/EBITDA of 3.4). Those numbers even put the stock on Joel Greenblatt's "Magic Formula" list -- something value-conscious Fools always like to see. Of course, the caveat with cheap stocks is that they're always cheap for a reason. Aspreva, whose unique strategy involves finding new uses for existing drugs, is certainly no exception.  

Aspreva's one and only deal is with Switzerland-based Roche, to commercialize a treatment called CellCept -- a drug with a major patent expiration looming in 2009, and for which it has yet to receive FDA approval in additional applications. So we're clearly dealing with a situation with tons of uncertainty and a real possibility of permanent loss. Buying Aspreva is essentially a bet that the company can land another huge deal (i.e. the business model is sustainable), or that CellCept will gain approval for indications such as lupus and pemphigus.

I'm no biotech expert or anything, but given Aspreva's growing cash pile, historical profitability, bullish sentiment from fellow Fools, and ridiculously low price multiples, I'd say this is one turnaround bet with some attractive asymmetrical odds.

Here are three CAPS players who also like their chances:  

CAPS All-Star JTShideler takes our mega-computer's advice and says: "ASPV was my recommended stock of the day, and after examining the comments of the CAPS community, I think I am going to join the bulls. It's never good to have a company with one real product, however, I think this is already priced into the valuation and with all that cash on hand, (Aspreva) should be able to do well."

Another CAPS All-Star, DancingNancies, sees Aspreva's management as the big edge in this bet: "Given the experience and talent of management, the track record of management, and the patience management has shown so far in finding a deal that will be worth shareholders' investment, I believe the odds are very favorable of a good deal being reached in the near future. The upside is at least a good double and the downside is around 50% at this moment."

Finally, CAPS contestant Qwyietman advises that investors remain patient: "The argument that no other deal will occur is weak; with 25% insider ownership, management has a vested interest in not running the company into the ground. As bullish as I am for ASPV, I do not believe the stock will see any significant upside until a deal is announced; I believe when that eventually happens, we will look back and wonder how the heck this stock ever traded this low."

Now, it's your turn(around)
What do you think, Fool? Will Aspreva finally get its stock turned around? Or are investors simply gambling on a one-trick pony waiting to get trampled?    

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 30,000 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 Foolish changes of direction:

• Get Ready for the Bounce
• Get Ready for the Fall
• A Summer Sell-Off in the Making?

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.