5 Top Turnaround Stocks

Everyone loves a great comeback story. 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 investors who buy 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 see what others don't. More importantly, they're willing to bet big on the stocks they believe will enjoy a reversal of fortune. Notable investors who've followed this strategy include Buffett, Templeton, Klarman, and many more.

We probably can't help you with your contrarian spirit, but we can offer you five possible turnaround ideas from our Motley Fool CAPS community. Despite being down 25% or more over the past year, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

These stocks have gotten slammed for very specific reasons, so don't view them as formal picks. They're simply suggestions you might want to investigate further. You always need to do due diligence -- especially when you're playing with tricky turnarounds.

Spilled shares
If bad news is a bargain hunter's best friend, shares of Cal Dive may be worth, uh, diving into. The stock is down 25% over the last month alone, but judging from our CAPS community, the offshore energy services company looks like an interesting proposition for patient investors.

Weak operating results, combined with crashing energy prices and uncertainty stemming from BP's (NYSE: BP) Deepwater Horizon disaster, have weighed heavily on the shares. Nevertheless, Fools still like the company for its strong insider ownership, history of free cash flow generation, and especially its current valuation.

With the stock selling at a P/E discount to competitors Global Industries (NYSE: GLBL) and Oceaneering International (NYSE: OII), Cal Dive looks like a potent way to play higher oil prices and an increase in deepwater drilling activity over time.

"May not be at the bottom yet, but count on new regulations mandating more regular repairs, inspections, and maintenance," said CAPS member wdh170. "On top of that, not a lot of debt, fair amount of cash, and a good rep in the industry."

Lactose tolerant
Dean Foods also remains highly out of favor with Wall Street. The food and beverage company had investors' stomachs churning over its most recent quarterly report, posting a 43% drop in earnings, but top-rated Fools aren't exactly giving up on the company.

Intense competition and volatile input prices in Dean's main segment, U.S. dairy, have wreaked havoc with results. In fact, heavy margin pressure prompted Moody's to cut the company's liquidity rating earlier this month, fueling even more fears over the stock. However, with sales roughly five times greater than its closest competitor, Dean's dominance of the U.S. dairy market has drawn Fools' focus.

Given its paltry forward P/E of 8.4, the stock offers a cheap bet on significant margin expansion over time, as management's aggressive cost-cutting measures take hold.

"The core business is profitable," said CAPS member TheStock. "The stripped rating that led to its rapid decline in price this month is based on tightening margins due to increased expenses. Management has talked about cutting costs in the short term and so the long term prospects for this stock look good as I see it trading at a big discount to intrinsic value."

Now it's your turn(around)
Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that you'll need more time and effort to figure them out.

However, the more than 160,000 fellow Fools in our community can help you get a head start on spotting some of the more probable plays. Click here to get started, absolutely free. More tasty, terrific, and (we hope) triumphant turnaround treats await.