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 can 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, 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 CAPS community. These stocks, despite being down 25% or more over the past year, have received a four- or maximum five-star rating 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:

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

No. 1 drafting pick
It's no secret that we Fools love businesses with strong competitive advantages. Of course, when you're screening through downtrodden stocks, insisting on a competitive edge is even that much more important. Autodesk, for example, is a turnaround play that inspired great confidence in our community because of its massive economic moat. Of the 141 CAPS All-Stars who've rated the leading provider of computer-aided design (CAD) software, just two have a negative opinion.

So what makes it so special? Well, over on Autodesk's CAPS page, you'll find plenty of Fools buzzing about the company's dominance in CAD software, strong financial position, and almost unbelievable profitability gained through its two powerful advantages: high switching costs and network effects. In other words, Autodesk is basically the industry standard, or as CAPS' millionairefools puts it, the "owner of the deepest moats known to the investing mankind."

Companies like Dassault Systemes (NASDAQ:DASTY) and Avid Technology (NASDAQ:AVID) offer similar products, but judging by the returns generated, castle Autodesk looks untouchable. Over the last three years, Autodesk has averaged returns on capital of 25%, versus 13% and 1.7% for Dassault and Avid, respectively.

That outstanding performance prompted my Foolish colleague Anders Bylund, back in March, to label Autodesk as one of the market's "most blatant mismatches between share price and business value". The shares have recovered some since then, but when you couple its top-notch quality with its shares' persistent position well below their 52-week highs, Autodesk seems to be one stock with plenty of bounce left in it.

In February, CAPS All-Star lemma illustrated exactly what a powerful moat can do: 

Try and work in engineering without using Autodesk software. Go ahead, try it.

Seriously, it's impossible. Even if the company didn't make great software products, engineers would still use them because they've learned to use, say, AutoCAD in school, and trained to use it in work applications -- it's all they know! It takes some time to master these applications, and there would have to be a very compelling reason for everyone in the field to switch over to using something else.

So, Autdodesk, you want to charge me $4,000 for each software package and $600 for a yearly update? Yeah, I'll pay that. What else am I going to do?

Now, its your turn(around)
Turnarounds offer an exceptional way to generate excess returns over the market -- but they also require an excessive amount of time and effort to figure out. However, with the help of over 110,000 fellow Fools in our community, you'll have a head start in spotting some of the more probable plays. Best of all, it's absolutely free to sign up.

More tasty, terrific, and (we hope) triumphant turnaround treats await.