5 Top Turnaround Stocks

Everyone loves a great comeback story. 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 investors who buy 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 see what others don't. More importantly, they're willing to bet big on the stocks they believe will enjoy a reversal of fortune. 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 five possible turnaround ideas from our Motley Fool CAPS community. Despite being down 15% or more over the past year, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

These stocks have been slammed for very specific reasons, so don't view them as formal picks. They're simply suggestions you might want to investigate further. You always need to do due diligence -- especially when you're playing with tricky turnarounds.

Deflation and hogs
It's not often that a company posting 50%-plus revenue growth has investors racing for the exits, but that's exactly the case with Chinese animal feed maker AgFeed. Despite relatively strong top-line growth, steadily falling hog prices have weighed heavily on the company's margins of late. With management forecasting a 12% to 15% increase in hog prices in the second half of the year, AgFeed seems like a reasonable value.

Just last month, CAPS All-Star CowboyCal urged Fools to ignore the fear:

AgFeed is the leading hog producer in China which has a larger hog market than America. They have plans for expanded hog farms. The price for pork is cyclical and currently is low, but with a rise in the price of pork, AgFeed should follow. They have excellent financials and show signs of a solid small-cap with huge potential growth.

Possible recovery
The danger with trying to catch a falling knife is that you always run the risk of grabbing it in the sharpest place. Well, after a first-quarter decline in profits helped trigger a 41% price drop in May, shares of Energy Recovery, which develops devices that help make water desalination more affordable, have bounced 40% over the past three weeks alone. As the shortage of potable water continues to escalate, Mr. Market finally might be coming to his long-term senses.

Earlier this month, CAPS member NewOldMoney offered some unique insight into the company's potential:

I have been contracting in the Middle East for years now...one thing I have learned for certain is that in this part of the world, potable water will soon become MUCH more costly than oil or any other necessity. Kuwait and Qatar are already investing big bucks in this technology and demand will only increase.

Balancing act
While the month of June has been great for Energy Recovery bulls, it has been a trying time for Smart Balance shareholders. The stock is down more than 30% for the month, with the biggest drop coming after management significantly cut its full-year sales outlook on weak growth for new products and big pricing pressure from the likes of Kraft (NYSE: KFT) and ConAgra (NYSE: CAG). Nevertheless, some in our CAPS community still believe Smart Balance offers an ideal way to play increasing numbers of health-conscious consumers.

Two months ago, CAPS member mamastox highlighted one person as a big reason for that bullishness:

CEO Stephen Hughes is a leader of innovation and for creating shareholder value in the consumer package goods, and the food and beverage industry. Hughes led the team that launched ConAgra's Healthy Choice line, building the brand's revenue to $1 billion in four years. ... [Smart Balance] is a good solid company with top executives. But, more than that I buy their products for my family and i am looking forward to the Smart Balance Milk to see if the taste holds up to the hype.

Now, it's your turn(around)
Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that you'll need more time and effort to figure them out.

However, the more than 165,000 fellow Fools in our community can help you get a head start on spotting some of the more probable plays. Click here to get started, absolutely free. More tasty, terrific, and (we hope) triumphant turnaround treats await.