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3 Top Turnaround Stocks

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.
  3. When they're being beat down to bargain-basement levels.

Meet the turnaround tycoons
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 three possible turnaround ideas from our Motley Fool CAPS community. Despite being down 20% or more over the past three months, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

Company

1-Month Return

Industry

Current CAPS Rating
(out of 5)

Joy Global (NYSE: JOY  ) (28.3%) Farm and construction machinery ****
Cloud Peak Energy (NYSE: CLD  ) (25%) Industrial metals and minerals ****
Freeport-McMoRan Copper & Gold (NYSE: FCX  ) (20.7%) Copper ****

Source: Motley Fool CAPS.

These stocks have been slammed for very specific reasons, so don't view them as formal picks -- just ideas you might want to investigate further. With that said, let's see exactly why some of our CAPS members believe they're good bets to bounce back.

Jumping for Joy
With its shares down nearly 30% over the past three months, mining equipment maker Joy Global tops this week's list of losers. Persistent fears over a slowdown in China and lower U.S. coal production have weighed heavily on the stock, but rebounding order rates and climbing operating margins of late suggest that things aren't as gloomy as Mr. Market thinks. In fact, giant Caterpillar (NYSE: CAT  ) posted a whopping 73% sales spike in its mining segment recently, offering further evidence that the demand for raw materials remains healthy.

CAPS member MHenage sums up the Joy Global bull case:

Good cash flow, good earnings growth. Supporting companies expected to grow earnings by 11[%]-20% in the next 5 years. Joy and [Caterpillar] can compete and not kill each other because there is enough business to go around. ... Price target of $150 if the company reaches earnings for 2012 and the P/E expands to meet projected earnings growth of about 20%.  

Cloud of uncertainty
Coal miner Cloud Peak Energy is yet another stock bruised by the mild winter and steady fuel-source switch from coal to cheap natural gas by electricity providers. However, our CAPS community just can't see how the long-term global demand for coal will be being anything but robust, making the sector an attractive place for value hounds to sniff around in. With Cloud Peak trading at a clear P/E discount to much larger peers like Arch Coal and Peabody Energy, it might be a good place to start.

CAPS member toaoyoda elaborates:

This was an opportunistic spinoff from Rio Tinto that had other fish to fry. It is a pure coal play on the Powder River Basin meaning that its coal is freer of sulfur albeit at the cost of somewhat lower thermal energy content per ton. ... It will increasingly target the Asian (especially China) market by shipping via ports in Oregon and Canada and so will be insensitive to environmental and other idiotic policies of the present administration.

Labor pains
Our last turnaround candidate this week is mining giant Freeport-McMoRan, which continues to be weighed down by production woes triggered by labor unrest at its Indonesia mine, as well as easing copper prices of late. In fact, close peer Newmont Mining (NYSE: NEM  ) has experienced similar headaches over the past several months (mining strikes, delays, and local opposition in Peru), reminding Fools that the space is particularly susceptible to short-term shocks. Over the next several years, however, China's appetite for copper should only get stronger, giving patient metal-heads a solid long-term opportunity.     

CAPS member BUbulldog expands on the Freeport turnaround case:

The stock is down ... based on labor unrest at one of its mines. All reports indicate that this has subsided. Most convincingly though, copper demand is expected to exceed supply for the coming year, which results in higher revenue for [Freeport]. Expect it to do well over the next couple of years, especially if the economy rebounds. Fears in China are overblown.

Now, it's your turn(around)
Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that they require a little more effort to figure them out.

But if you're crunched for time, we've compiled a special free report called "The Stocks Only the Smartest Investors Are Buying," which uncovers several other bargains that the value master himself, Warren Buffett, thinks highly of. The report is 100% free, but it won't be around forever, so click here to access it now.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool owns shares of Freeport and Joy Global. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.


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Brian Pacampara
TMFEZMagic

I take a look at big 10% moves, as well as stock-shaking analyst calls, on a daily basis for The Fool. While I don't believe in active trading, closely monitoring Mr. Market's mood swings can help identify long-term opportunities.

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Related Tickers

10/20/2014 4:00 PM
CLD $10.82 Down -0.10 -0.92%
Cloud Peak Energy CAPS Rating: ****
FCX $30.76 Up +0.42 +1.38%
Freeport-McMoRan C… CAPS Rating: ****
JOY $51.14 Down -1.03 -1.97%
Joy Global, Inc. CAPS Rating: ****
CAT $94.03 Down -1.02 -1.07%
Caterpillar, Inc. CAPS Rating: ***
NEM $22.85 Up +0.45 +2.01%
Newmont Mining Cor… CAPS Rating: ***

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