Color to the Numbers: Top Turnaround Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was because of one-time tax adjustments and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for beaten-down turnaround stocks to see which stocks may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for turnaround plays. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking higher than 80 -- rate a given stock. CAPS even has pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our turnaround screen for today and a handful of the top stock candidates it returned. We'll run a pretty simple screen using the following criteria:

  • Market cap of at least $1 billion.
  • Share prices within 10% of their 52-week low.
  • Free cash flow of at least $100 million.
  • Total debt-to-equity ratio of less than 0.5.

This should give us a good selection of stocks that are beaten down, yet still capable of turning the ship around. We'll limit the screen to larger companies that are close to their 52-week low, yet still churning out a good level of cash. The debt-to-equity ratio will eliminate highly leveraged companies that may be overly burdened by interest expenses, as well. But even companies with a decent balance sheet may be under selling pressure for good reason. (Hint: This is where CAPS can really help.)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Company

Free Cash Flow (Millions)

% Below 52-Week High

CAPS Rank (out of 5)

Johnson & Johnson (NYSE: JNJ  )

$11,945

(10%)

****

Genentech (NYSE: DNA  )

$1,266

(16%)

***

Motorola (NYSE: MOT  )

$2,183

(43%)

**

Starbucks (Nasdaq: SBUX  )

$139

(45%)

**

Public Storage (NYSE: PSA  )

$558

(51%)

*

With our screen looking for established companies, most of the stocks on our list are familiar names. But investors may not be aware that these companies have been struggling lately, with shares declining significantly while the broader market advances. Let's dig a little deeper into a few of them and see if the selling trend may be overdone on some companies.

Practically a household name, consumer-product and health-care giant Johnson & Johnson is not a stock you'd expect to find in the basement. But investors have several concerns about the company, including significant drug patents close to expiration and looming threats of cheap generic drugs. While Fool pharma expert Brian Lawler contends that the company's drug pipeline is still quite pretty, lingering uncertainty has nonetheless kept pressure on shares. Even with the current issues and potential problems, though, more than 95% of CAPS All-Star investors believe JNJ can soothe this bad rash and beat the market in the future.

Jumping over to the tech sector, we find struggling mobile phone manufacturer Motorola. The company was riding high a little more than a year ago on blistering sales of its popular RAZR handsets. But the ultra-thin communicator quickly became sooooo yesterday -- and Motorola still doesn't have a good answer to the product today. As popularity for Motorola phones has dropped around the world, so have revenue, profits, and employees -- leaving CEO and once-knighted mobile czar Ed Zander fighting to retain his job. Indeed, many investors are calling for change in upper management to get the company back on track.

You'd think Starbucks would have enough caffeine-saturated coffee grounds on hand to jolt its shareholder base into buying more stock rather than selling, but the coffee giant has had no such luck lately. Starbucks has been shunned by investors thanks to evidence of slowing growth and the negative impact from rising dairy prices. Performance below historical rates begets share prices below historical levels, so investors have been knocking the premium beans out of Starbucks, leaving the firm at a lower (yet still pricey) P/E of 34. Renewed concerns about market saturation and products priced way above growing competition from the likes of McDonald's and Dunkin Donuts is enough for more than one in five CAPS All-Stars to flash the bear card on the company.

Let 60,000 investors be the judge
It's always difficult to tell just where opportunities may lie with beaten-down stocks, especially when you're just "running the numbers." Thankfully, the collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers, helping the process. But even with an entire community of qualified opinion-holders acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.

Starbucks is one of more than 100 stocks selected by theMotley Fool Stock Advisor newsletter service to provide market-beating returns. With an average return of 76% versus the S&P's 38% to date, it's worth checking out the service with a free 30-day trial.

Fool contributor Dave Mock does his best to color within the lines, but he reserves his right to artistic expression. He owns shares of Motorola and Starbucks. Dave is the author of The Qualcomm Equation. Johnson & Johnson is an Income Investor recommendation. The Fool's disclosure policy doesn't see color or the wart on your nose.


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