Color to the Numbers: Top Turnaround Stocks

With Internet sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return lists of stocks that need to be weeded, because the numbers don't tell the whole story. For instance, maybe a company's massive growth was a result of one-time tax adjustments and not core operations.

So just like the color-by-numbers books for kids, the picture for stocks pulled from any screen isn't clear until the right color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for beaten-down turnaround stocks to see which stocks may be worth investigating further and which ones should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search. In CAPS, investors can see how the collective community rates a company, and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are also pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources beyond mere numbers and tables.

So let's take a look at our turnaround screen for today:

  • Market cap of at least $1 billion.
  • Share prices within 10% of their 52-week low.
  • Free cash flow of at least $100 million.
  • Total debt-to-equity ratio of less than 0.5.

This will give us a good selection of stocks that are beaten down, yet still capable of turning the ship around. But some companies may be under selling pressure for good reason. (Hint: This is where CAPS can really help.)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Company

Free Cash Flow
(Millions)

% Below
52-Week High

CAPS Rank
(out of 5)

UnitedHealth (NYSE:UNH)

$5,352

(15%)

*****

Lowe's (NYSE:LOW)

$918

(22%)

***

Pfizer (NYSE:PFE)

$11,478

(14%)

***

Sprint Nextel (NYSE:S)

$1,768

(25%)

**

Home Depot (NYSE:HD)

$3,305

(23%)

**

Mattel (NYSE:MAT)

$617

(25%)

*

Data taken from Yahoo! Finance. Star rankings from CAPS. All data as of Oct. 16.

Upon this house
It's certainly no surprise to see homebuilding-material suppliers Home Depot and Lowe's both making the turnaround screen. With more mortgage failures pending and credit tightening, consumers are less likely to take on home-improvement projects or spruce up the yard. But while same-store sales are down largely due to overheated housing markets in areas such as California and Florida, Lowe's was still able to grow diluted earnings per share by 12% last quarter.

Much of the fears surrounding the housing excesses of the past are already priced into shares of Home Depot, Lowe's, and home builders such as Toll Brothers (NYSE: TOL  ) , Pulte, and Lennar. CAPS investors have mixed opinions, although they slightly favor Lowe's over Home Depot in the home improvement sector. Strong cash flow, share repurchases and room to add more new stores are reasons why more than 90% of CAPS investors believe that Lowe's stock will outperform the S&P going forward. Home Depot has slightly more than 75% of CAPS investors who rated it holding the same confidence in its market-beating performance.

Toy Story
The past year has not been a happy time for toymaker Mattel; numerous recalls have hit the company hard. While Mattel and the media were quick to blame Chinese manufacturers, the company later 'fessed up and acknowledged that design flaws were behind many of the recalls.

Many investors are not convinced that Mattel is dealing with isolated, short-term problems. Other product initiatives aren't doing well, and some investors think the holidays could be bleak for Mattel's tainted brand. Out of the 84 CAPS All-Stars rating the company, 31 think this story won't produce a happy ending for shareholders and have logged bearish votes on the stock.

Let 65,000 investors be the judge
It's difficult to tell where opportunities lie with beaten-down stocks, especially when you're just "running the numbers." Thankfully, the collective wisdom of a huge pool of investors can add color to a whitewashed page of numbers, helping the process. But even with an entire community of qualified opinion-holders acting as judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.


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