5 Top Turnaround Stocks

Everyone loves a great comeback story. And 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, or
  3. when they're being beat down to bargain-basement levels.

Meet the turnaround tycoons
Those investors are able to do so because they see what other investors don't. More importantly, they're willing to bet big on the stocks they're certain will experience a reversal of fortune. The names behind this strategy include Warren Buffett, John Templeton, Eddie Lampert, and many more.

We probably can't help you with your contrarian spirit, but here are five possible turnaround ideas from our Motley Fool CAPScommunity. These are stocks that, despite being down 25% or more over the past year, have earned a four- or five-star rating (out of five) from our pool of individual and professional investors. In its first year, CAPS' top-rated stocks, on average, have topped the market.

So, without further ado:

Company

One-Year Return

Industry

Current CAPS Rating

VASCO Data Security (Nasdaq: VDSI  )

(53%)

Security software and services

*****

Jones Lang LaSalle (NYSE: JLL  )

(47%)

Property management

*****

Sigma Designs (Nasdaq: SIGM  )

(46%)

Semiconductor

*****

Flotek Industries (NYSE: FTK  )

(44%)

Specialty chemicals

*****

Barnes Group (NYSE: B  )

(26%)

Industrial equipment

*****

Just a word of caution. These stocks have been beaten down for very specific reasons. Don't view them as formal picks, but rather as suggestions you might want to investigate further. Due diligence is always required -- especially when you're playing with tricky turnarounds. 

Keeping up with the Joneses
Call me crazy, but my favorite bounce-back opportunity this week is a real estate play. Now before you throw "credit crisis" and "subprime"-laced emails my way, consider this fun fact: Despite it being a multibillion-dollar property management company, 97% of the CAPS All-Stars who've rated Motley Fool Hidden Gems pick Jones Lang LaSalle are bullish. The big reason for that top-notch support? Jones Lang LaSalle's global prospects.

For those who haven't heard of Jones Lang LaSalle, it's one of the worldwide powerhouses in commercial real estate services. It operates out of 160 offices, in more than 100 markets in 50 countries, and sports a blue-chip roster of clients including Microsoft (Nasdaq: MSFT  ) , Motorola (NYSE: MOT  ) , and Pfizer. Roughly two-thirds of its revenues come from beyond U.S. borders, so it's no surprise that our community sees the stock's weakness as a classic "baby out with the bathwater" situation.

Click on the company's CAPS page and you'll find plenty of bullishness about its strong presence in India and Asia, dominant competitive position, and mouth-watering profitability.

According to Capital IQ, Jones Lang LaSalle's returns on capital increased from 5.8% in 2003 to an impressive 22.9% in 2007, all while the company was generating gobs of free cash flow. Analysts expect double-digit earnings growth over the next five years, bringing us to CAPS Fools' favorite reason to jump in: the valuation.  

Jones Lang LaSalle trades at a seemingly attractive PEG ratio of 0.86. For a bit more context, know that less-internationally-focused rivals CB Richard Ellis and Grub & Ellis trade at PEG ratios of 1.35 and 1.31, respectively. When you couple Jones Lang LaSalle's exposure to some of the world's best real estate markets with the fact that you can now invest in it at a bargain price, I'd say it's a turnaround candidate to at least keep your eye on.

But that's enough out of me. Let's let a pair of CAPS players have their say.

Three weeks ago, CAPS player PrincetonAl touched on the company's powerful tailwinds:  

Tied to a good megatrend? Global growth of commercial office space in many markets -- check. Well run and well respected? Yes. Down well off its highs because of near term concerns? Yes. Sounds like a recipe for a long-term outperform.

And just a few days ago, CAPS All-Star Wayfarer2003 urged Fools to buy low:

Jones Lang LaSalle's exposure to global commercial real estate provides a great way to diversify internationally while obtaining the more clear financial statements and practices of a U.S. company. Take advantage of the low real estate market now before it recovers.

Now, it's your turn(around)
The great thing about turnarounds is that they offer an exceptional way to beat the market. The catch, of course, is that they require extra time and effort to figure out. But, with the help of more than 110,000 fellow Fools in our community, you'll have a head start in spotting some of the more probable plays. So click here to get started, absolutely free.

VASCO Data Security is a Stock Advisor pick. Sigma Designs has been recommended in both Rule Breakers and Motley Fool Hidden Gems Pay Dirt. Pfizer has been recommended in both Income Investor and Inside Value. Microsoft is an Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Foolish contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy is always headed in the right direction.


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