Top Turnaround Stocks

On the heels of the greater-than-15% gains the S&P 500 posted in 2006, it's more important than ever to make sure that we, as smart investors, never overpay. Remember, fortunes are made by the investors who succeed in buying great stocks while they're down. Seriously. And those investors can do so because they're willing to take a hard look at every falling knife, and bet big on the stocks they're sure will turn around.

Meet the masters
The names behind this strategy include Buffett, Munger, Weitz, Olstein, and many more. It's also the strategy the Fool's own Philip Durell preaches at Motley Fool Inside Value. But you don't need to be a master investor or an Inside Value subscriber to be a value investor. All you need is patience, a willingness to be contrary, and some good ideas.

We probably can't help you with your patience or your contrarian spirit, but here are five ideas from Motley Fool CAPS, a new community-intelligence database that asks investors to rate stocks. In turn, every investor is ranked, as is every stock. As more people participate and more time passes, we hope to determine the best investor and the best stock in America -- and potentially the world. (Admittedly, we'll have to roll this thing out of beta testing before we can start talking about global domination.)

And now for the stocks ...
These stocks, despite being down more than 10% over the past year, have received a five-star rating from our pool of individual and professional investors:

I've been following Primus Guaranty since June 2006, when my colleague Richard Gibbons first wrote about it. The stock has recovered some 20% since then. But if you'll excuse me for mixing my metaphors here, this boat hasn't yet left the station. Richard's optimistic valuation put Primus shares in the $20 to $25 range -- a nice return from the stock's current price.

That said, this stock presents notable risks. First, it's a small player in an industry dominated by bigger firms such as Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM). Second, it's a young company without much of a track record. And third, if you believe that our economy is ripe for a downturn, and that companies could begin defaulting on debt, this is not the time to own shares of a company like Primus, which makes its mint selling credit default swaps.

While each of these stocks is worth your time, remember that these are not recommendations. I'm simply offering up ideas that CAPS has generated in the name of further research.

After all, when you go digging for dirt cheap stocks, it's absolutely crucial to do your own due diligence. If you'd like to get started doing just that, come and see what our CAPS investors are actually saying about these companies -- join CAPS for free today.

This article was originally published on January 4, 2007.

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At the time of publication, Tim Hanson did not own shares of any company mentioned. Bank of America and JPMorgan are Income Investor recommendations. The Fool's disclosure policy assures you that no stocks were harmed in the penning of this article.