5 Top Turnaround Stocks

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
  3. When they're being beat down to bargain-basement levels.

Meet the turnaround tycoons
Notable investors who've followed this strategy include Warren Buffett, John Templeton, Seth 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 10% or more over the past three months, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

Company

3-Month Return

Industry

Current CAPS Rating
(out of 5)

Heckmann (NYSE: HEK  ) (37%) Oil and gas equipment and services ****
Arch Coal (NYSE: ACI  ) (24%) Coal and consumable fuels ****
National Presto Industries (NYSE: NPK  ) (17%) Appliances and defense *****
CARBO Ceramics (NYSE: CRR  ) (16%) Oil and gas equipment and services ****
Baker Hughes (NYSE: BHI  ) (13%) Oil and gas equipment and services ****

These stocks have been slammed for very specific reasons, so don't view them as formal picks -- just ideas you might want to investigate further. With that said, let's see exactly why some of our CAPS members believe they're good bets to bounce back.

Wasted opportunity
With its shares down more than 30% year to date, Heckmann -- which disposes of wastewater involved in the fracking process -- tops this week's list. While the company's recent results have been hurt badly by a slowdown in the Haynesville shale region, our community believes that its solid management team, coupled with strong long-term tailwinds, makes the stock a genuine bargain.    

CAPS All-Star tenmiles elaborates:

[Chairman and CEO Richard Heckmann] clearly knows how to acquire and integrate businesses. ... tens of thousands of new wells will be drilled in the next ten years all requiring water remediation and disposal. This one will likely be a winner for those of us who scale in over time.

Bet on black 
While Heckmann seems to have fallen over a cliff in 2012, Arch Coal investors have experienced a much more steady beating. The stock is down a whopping 70% over the past year on weak U.S. coal prices and fears over its fickle financial position; however, many in our community think it's just too battered to ignore. 

CAPS member Becker2011 explains:

Coal has been beaten down for a while now. This is seemingly a great time to pick up a solid company that is not going any where soon. As someone who has worked inside of a large power company and seen how much green energy costs ... well lets just say I don't see sweeping changes to the nation's power portfolio any time soon.

Punctured Presto
Unlike our first two stocks, National Presto is highly -- almost unusually -- diversified, but that hasn't prevented Mr. Market from punishing it. The stock sold off violently in late February after the issuance of its annual dividend ($1-per-share regular dividend and a $5 special dividend), but many Fools believe it was a clear overreaction.

CAPS member Clint35 sums up the bull case:

Cheap with a good dividend. Sometimes a special dividend too. They treat shareholders well. They care much more about running a good business than they do about making the numbers to impress Wall Street.

A fracking good pick
Just like Heckmann, CARBO Ceramics has been hurt heavily by the sharp drop in horizontal wells being drilled in the Haynesville shale area. However, the company's solid fundamentals and cheapish valuation, coupled with the rising popularity of horizontal fracking, make the stock a tempting long-term pick according to CAPS.

Fellow Fool Rich Duprey (TMFCop) breaks down the opportunity:

I think the short-term picture is clouded by low natural gas prices which is causing drillers to take production offline (and causing proppant inventories to build up for CRR). But with the country flush with nat gas reserves it can't help but be a long-term bullish situation. When prices rise and drillers drill with abandon again, CARBO will prosper too.

Baker bargain
Our last turnaround candidate this week is oil-field services specialist Baker Hughes, which has been punished over the past few months on depressed natural gas prices, as well as a multitude of efficiency problems. With decent financials and strong secular tailwinds working in its favor, though, our CAPS community thinks it's just a matter of time before the stock bounces.        

CAPS All-Star JPresbrown expands on this:

A bit of a contrarian play -- the stock has massively underperformed the market and been downgraded by analysts because of the glut of natural gas. Everyone knows business is slowing which makes this a good time to establish a position in a solid company with decent fundamentals.

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 180,000 members in our CAPS 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.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Motley Fool owns shares of Heckmann, National Presto, and CARBO. Try any of our Foolish newsletter services free for 30 days

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.


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