5 More Turnaround Stocks

Everyone loves the underdog. Whether it's Lance Armstrong recovering from cancer to win the Tour de France, or Seabiscuit coming down the stretch to overtake much larger equine enemies, nothing beats a great comeback story.

And in the stock market, few things are more profitable than finding 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
And those investors are able to do so because they can spot value in companies that other investors don't even know exist. 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, Price, 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 are stocks that, despite being down more than 15% over the past year, have received a five-star rating (the highest) from our pool of individual and professional investors.

So, without further ado:

Just a word of caution: These stocks have been beaten down for very specific reasons. So don't view them as formal picks, but rather as suggestions you might want to investigate further. Due diligence is always required -- especially when you're playing with tricky turnarounds.

With that said, Nam Tai Electronics caught my eye as an interesting (possible) comeback story.

Medical service for this EMS?
2006 was a tough year for the electronic manufacturing services (EMS) industry. Beset by ravenous competition and pricing pressure from consumers, EMS firms worldwide have been feeling an electronic margin shock.

Among the most heavily affected was -- and continues to be -- Nam Tai Electronics, a China-based producer of electro-gadgets like calculators, digital cameras, mobile phones, and LCD panels. In the last quarter, for example, operating income dropped a staggering 118%. Ouch.

Wall Street, for one, doesn't expect the pressure to let up anytime soon. Analysts expect diminishing consumer demand and even increased competition from other low-cost markets like Europe and Latin America to continue to hurt the industry -- especially Nam Tai. The reason is that Nam Tai -- whose focus is on high-growth but lower-margin products -- is much more vulnerable to consumer demand and pricing pressure than the average EMS firm. So far, that has proven to be the case.

But, of course, this wouldn't be much of a turnaround idea if all hope was lost for our friends from the Far East. Although Nam Tai's deteriorating margins are a legitimate cause for concern, the company's sales growth and financial health are what have our CAPS community buzzing. Let's look at the brighter side of things now.

Tai-fighting back
In 2006, net sales increased 9.1%, representing the eighth consecutive year that Nam Tai has posted top-line growth. Management expects sales to grow 12% in 2007, while aggressive plans to increase capacity -- in order to serve the fast-growing telecom and LCD market -- should fuel growth over the long run.

As I briefly alluded to earlier, Nam Tai's voracious appetite for growth -- even at the expense of profitability -- is what has many investors worried. But since Nam Tai already generates returns on equity in the mid-teens and operating cash flow well in excess of all capex spending, not to mention its comfy cash cushion of more than $220 million (with minimal debt), management seems to be making a well-calculated, strategic bet.

Of course, you can never tell exactly how things will play out, but with Nam Tai's stock trading at a P/E of 15 -- with a dividend yield of 6.2%, to boot -- it seems that investors would be paying a cheap price to take the bet, also. To put that in perspective, Nam Tai's less profitable, slower-growing competitors, Jabil (NYSE:JBL) and Solectron (NYSE:SLR), trade at 20 and 29 times earnings, respectively.

Taken all together, I'd say that Nam Tai is a strong candidate to bounce back -- and high. But don't just take my word for it. Here are two CAPS contestants who feel Nam is set to manufacture a more-than-marginal turnaround:

• azaloth: "Fundamentals look good ... Intuition tells me this stock will bounce back. Most of my top gains have come from buying after a market over-reaction and the recent crash of this stock definitely qualifies as such in my book."

• WBass1: "Shrinking margins in highly competitive electronics business have pushed this stock down. NTE is still growing and a new factory will add to 2007 results leading to a price rebound. Dividends have been reduced for 2007, yet at this price should still give a nice yield and help this stock to outperform."

Now, its your turn(around)
So what do you think, Fool? Is Nam Tai revved for a rebound or are there plenty of free-falling miles left before we see rock bottom? The great thing about turnarounds is that they offer an exceptional way to generate excess returns over the market. The catch, of course, is that they require an excess amount of time and effort to figure them out.

But, with the help of more than 23,000 fellow Fools in our community, you'll have a head start on spotting some of the more potent plays. So, click here to get started for absolutely no charge. More tasty, terrific, and (hopefully) triumphant turnaround treats await.

For more CAPS-related fun:

• 5 Dynamic Dividend Stocks
• This Just In: Upgrades & Downgrades
• 5 Low-Priced, High-Star Stocks

As a child, Fool contributor Brian Pacampara tried to turn around his ailing lemonade stand, but freeloading friends (and family) ran him out of business. He owns none of the companies mentioned. The Fool's disclosure policy is always headed in the right direction.