5 More Turnaround Stocks

Editor's note: An earlier version of this story incorrectly stated the one-year return of Alberto-Culver (NYSE:ACV). We regret the error.

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 Buffett, Templeton, Price, and many more.

We probably can't help you with your contrarian spirit, but here are five possible turnaround ideas from our Motley Fool CAPS community. These are stocks that, despite being down 20% or greater over the past year, have received a four or five-star rating from our pool of individual and professional investors.

So, without further ado:

Just a word of caution. These stocks have been beaten down for very specific reasons. So, 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.  

Any Palomar is a pal o' mine
I'm not a big fan of timing stocks. But sometimes, I just have to give it the ol' college try. This week, I'll try my hand with Palomar Technologies, whose stock is down 48% from its 52-week highs. After reading a couple of Foolish articles about the cosmetic-laser company, I can't help but think we're approaching some kind of "bottom." Let me explain why.

Palomar's stock was beaten up badly last July after it reported less-than-stellar top-line results. However, as my Foolish colleague Brian Orelli points out, last year's second quarter included a large royalty payment from Cutera, which ended up skewing year-over-year comparisons. Sales growth, on the other hand, was up 31%, indicating strong demand for the company's products -- something that our CAPS community firmly believes will continue.

Currently, 384 CAPS players are positive on Palomar, with just 11 dissenting bears. Many bulls argue that Palomar is a best-of-breed aesthetic laser pick, having far better technology than competitors like Syneron (NASDAQ:ELOS) and the previously mentioned Cutera. I'll leave that for you to investigate, but for now, what intrigues me most about Palomar is the valuation.

Palomar currently sits on $121 million in cash (and no debt), while the stock trades at an EV/EBITDA of 8.0. To be sure, valuing Palomar isn't exactly straightforward, as royalties are becoming an increasing part of the business. But with product sales growing nicely, the stock close to its 52-week low, and with management recently announcing a one-million share repurchase program, it just might be time for Palomar to bounce back.

Now, let's turn around to our community for some comments ...

CAPS player reinhs weighs the good and the bad:

Some markets will get pinched with a tight economy, but this technology can fix things nothing else can. They have no debt, great margins and a very real technology. I'm not thrilled with the P/E or price-to-book, but I've talked to customers and they LOVE the results they got from treatment.

BoiseDad agrees, adding:

This is a crowded space, but their stock is exciting for two reasons. First, they have strong intellectual property, and have won lawsuits against other competitors who must now pay PMTI significant royalties. Secondly, they just received FDA approval for an in-home hair removal device that will be marketed by Proctor & Gamble (NYSE:PG). In my opinion, this is the only way to play the growth in the cosmetic laser device industry.

Now, its your turn(around)
The great thing about turnarounds is that they offer an exceptional way to generate excess returns over the market. The catch, of course, is that they require an excess amount of time and effort to figure out. But, with the help of over 65,000 fellow Fools in our community, you'll have a head start on spotting some of the more probable plays. So, click here to get started, absolutely free.

More tasty, terrific, and (hopefully) triumphant turnaround treats await:

• Get Ready for the Fall
• Get Ready for the Bounce
• 7 Highly Rated Stocks on Sale