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:
- During times of maximum pessimism.
- While they're being ignored and forgotten.
- 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 15% 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:
Current CAPS Rating (out of 5)
|Clean Energy Fuels (Nasdaq: CLNE )
|Caterpillar (NYSE: CAT )
||Construction and farm machinery
|Bridgepoint Education (NYSE: BPI )
||Education and training services
Sources: 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.
Fueled for the future
With its stock down more than 30% over the past three months, natural gas fueling company Clean Energy Fuels tops this week's list of losers. The stock has been crushed on concerns that the transition to natural gas vehicles is moving slower than expected, but for those with a little patience, the company's first-mover advantage in the space puts it in a solid long-term position. Although it's certainly still speculative, Clean Energy's already large (and growing) national network of fueling stations makes it a tasty play on the historically wide gap between natural gas and diesel prices.
CAPS member mwlove elaborates:
There can be little doubt that natural gas usage is the way forward in US energy independence. Clean Energy Fuels is farther along in developing a distribution network than is anyone else. The focus on truck fleets is a sound short-term strategy, and the possibility of a mass auto market in the future would mean huge profits. ... They don't need to dominate the mass market, just have a piece. The recent sell-off gives a great entry point.
Come crawling back
Construction equipment giant Caterpillar is another company that hasn't been receiving credit for the solid revenue growth it's been posting of late. Despite being on pace for a record-breaking 2012, worries over slowing demand in emerging markets have sent the stock tumbling recently, with last week's full-year profit warning from rival Joy Global (NYSE: JOY ) being the latest cause for concern. However, when you consider Caterpillar's dominant scale, clearly rebounding North American end markets, and red-hot global mining segment, those fears seem largely overblown to many Fools.
CAPS member TMFBoomer (fellow Fool Isaac Pino) expands on the bull case:
Caterpillar generates 60% of sales overseas, realizes greater margins on these sales, has taken its supply chain and exported it to these markets and operates efficiently around the world. Long-term, I think it will continue to be a leader in its industry and can only benefit from a better housing market in the US in the near future.
Back to school
Our last turnaround candidate this week is for-profit educator Bridgepoint Education, whose shares remain depressed under the big cloud of regulatory uncertainty over the entire industry. But while the likes of Apollo Group (Nasdaq: APOL ) and DeVry have experienced significant blows to the bottom line, Bridgepoint continues to enjoy relatively strong growth. In fact, management expects EPS to jump to $2.54 this year, giving Bridgepoint's stock a lower forward P/E compared to those previously mentioned peers.
CAPS All-Star BlacknGold touches on the hidden trends working in Bridgepoint's favor:
Most people don't know it, but the Federal government has mandated that all new graduate school loans be unsubsidized. Furthermore, a growing number of undergraduate loans are also moving into the unsubsidized realm. These moves will put a higher strain on the already overwhelmed college student and make online schools even more attractive. Bridgepoint is well positioned to capitalize on this trend.
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 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.