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 beaten 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 15% 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:
Current CAPS Rating
|SMART Technologies (Nasdaq: SMT )||(34%)||Computer storage and peripherals||****|
|Rubicon Minerals (AMEX: RBY )||(27%)||Gold||****|
|RPC (NYSE: RES )||(24%)||Oil and gas equipment and services||****|
|Petrobras (NYSE: PBR )||(23%)||Integrated oil and gas||****|
|Telefonica (NYSE: TEF )||(18%)||Telecom services||*****|
Source: Motley Fool CAPS.
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.
With its shares down more than 30% over the past three months, digital whiteboard maker SMART Technologies tops this week's list of losers. Weak spending in the North American sector continues to pressure revenue, while the company's heavy debt load amplifies the problem, but many in our community believe that SMART's still-attractive growth prospects are now available on the ridiculously cheap.
Beaten down of late and sitting by its 52 week low again. Fairly high debt load, but has been profitable ... and has paid a large portion of their debt down. Authorized a share repurchase program of 4 million shares last year as well. Interesting concept and largely undervalued. ... Long term buy as it will take time for the education market to settle, but I believe SMART will be a long term winner.
About a year ago, gold miner Rubicon Minerals scaled back the expectations for its Phoenix Gold Project in Ontario's Red Lake District, and the stock has been on a downtrend ever since -- sliding gold prices haven't exactly helped, either. However, with the permits now in place for Rubicon to produce a still-exciting 180,000 ounces per year, many Fools think that Mr. Market will soon come to his senses.
I am optimistic that these guys are, literally, sitting on a gold mine and although they have been shaky over the last few months ... their potential will start to shine through. With the economy still looking decidedly uncertain and everyone clamoring to buy gold [Rubicon] offers a low cost way to get your toes in the pool with the excellent potential of providing you a large wave into a big return.
Among value hounds in our CAPS community, oil-field services specialist RPC continues to be an increasingly popular "pick-and-axe" play on depressed natural-gas prices. The stock has slumped along with the number of horizontal wells being drilled in shale formations, but its cheapish valuation -- dividend yield of 3.5% and P/E of 6.7 -- doesn't seem to be factoring in the attractive long-term prospects of horizontal fracking.
[B]eaten down due to the depressed nat gas price causing a slow down in drilling activity by the producers. However, the global rig count is just slightly off. While the results of this past quarter may be affected, these companies are way undervalued with excellent fundamentals. [RPC] should rebound by mid-summer to a more respectable level.
Oil and gas giant Petrobras has long been considered a solid way to access exciting Brazilian growth, but a string of production misses and refining losses over the past year have done well to stunt that investment thesis. Of course, with production poised to rebound in 2012 and double-digit profit growth still expected over the next three to five years, our CAPS community isn't ready to give up on Petrobras' prospects just yet.
CAPS All-Star mwlove expands on the opportunity: "Petrobras has huge reserves and economic growth in Latin America will keep up the demands for their products. It trades at a discount relative to other oil companies, and although it lacks the big dividend, it's a bargain right now."
Pain in Spain
Our last turnaround candidate this week is telecom giant Telefonica, whose shares continue to set new 52-week lows on concerns over the Spanish economy. However, when you consider how well Telefonica's solid geographic diversification -- particularly, its exposure to high-growth Latin America -- has been offsetting some of that revenue pain in Spain, Mr. Market's punishment seems completely overdone at this point.
Spain is only a portion of their revenue, double digit growth in [Latin America]. [E]xpanding cell base and they have been good with their equity. Look, if the euro blows up and returns to 1999, the dividend still pays you a 6%. Or they shore up the finances and cut the payout. Money is there, you just have to pick it up. I like it. I own it.
Now, it's your turn(around)
Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that they require a little more effort to figure out.
But if you're crunched for time, we've compiled a special free report called "The Stocks Only the Smartest Investors Are Buying," which uncovers several other bargains that the value master himself, Warren Buffett, thinks highly of. The report is 100% free, but it won't be around forever, so click here to access it now.