3 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 three 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:

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.

Coal'd streak
With its stock down a whopping 45% over the past three months, coal producer Alpha Natural Resources tops this week's list of losers. The stock has been battered by weak demand from power utilities caused by the mild winter, steady trend toward cheap natural gas, and indigestion from its purchase of Massey Energy, but many Fools think that over the long haul, Alpha stands to be one of the healthier players in the space. Specifically, Alpha's solid liquidity position, combined with its strong position in export markets, should help it gain an edge over cash-crunched rivals Arch Coal (NYSE: ACI) and Patriot Coal when global demand bounces back.

CAPS member chicagoadvisor expands on the bull case:

This is shaping up to be a deep value buy, manageable liabilities ... book value [more than 2x] recent trading prices. Coal will be here for a very long time, providing electricity, heat and being purchased from the [emerging markets] & [E]uropeans for the same purpose. I like it.

Foiled opportunity
Commodity stocks continue to be pressured by Europe's debt troubles, as well as fears over slowing growth in China, and aluminum king Alcoa is certainly no exception. With the stock trading at a clear price-to-book discount to Rio Tinto (NYSE: RIO) and Xstrata, however, Mr. Market may be overlooking Alcoa's size, efficiency-enabling vertical integration, and the attractive long-term outlook for aluminum prices. As one of the few pure aluminum plays with upstream assets, Alcoa may even be a tantalizing takeover target for one of those mining giants.

CAPS All-Star buffalonate touches on the tailwinds working in Alcoa's favor:

Light-weighting cars for better gas mileage will require much greater use of aluminum going forward. Also the aviation industry is growing rapidly worldwide which means aluminum will be in high demand to make the planes for a long time. Just look at Boeing's plane backlog and that should tell you that Alcoa's future is bright.

Apply yourself
Our last turnaround candidate this week is chip-gear giant Applied Materials, whose shares remain depressed on the investing slowdown by semiconductor companies, as well as persistently weak sales in its display and solar business. But while the global solar panel glut likely won't get soaked up anytime soon, a boost in foundry orders from chip makers in recent months, coupled with the ever-increasing demand for high res-display mobile devices, sets the stage for a decent growth going forward. More important, with an excellent balance sheet and cheapish forward P/E of nine, the stock's downside seems well protected.

CAPS member CoreAndExplore expands on the bull case:

The mobile device boom is only going to continue and [Applied Materials] stands to benefit. Now that management is once again focusing on the more lucrative end of the business and putting less into solar technology, margins should begin to increase again.

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 them 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.