5 More Turnaround Plays

An earlier version of this article incorrectly included Riverview Bancorp in the group that lost value over the past year. We regret the error.

Everyone loves an underdog. Whether it's the Sox overcoming a three-game deficit to beat the Yanks, or Rocky Balboa re-entering the ring for the umpteenth time, 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 investors who successfully buy great businesses:

1. during times of maximum pessimism,
2. while they're being ignored and forgotten, or
3. when they're being beaten down to bargain-basement levels.

Meet the turnaround tycoons
Those investors can spot value in companies that others never even notice. 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 may not be able to help you cultivate that contrarian spirit, but here are five possible turnaround ideas from our Motley Fool CAPS community. Despite dropping more than 20% over the past year, these stocks have received five-star ratings from our pool of individual and professional investors:

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

With that said, FreightCar America caught my eye as an interesting (possible) comeback story.

A FreightCar Fools desire
After yesterday's market debacle, brought on by an onslaught of China Syndrome, it wasn't hard to find battered stocks lying at the side of the road. But FreightCar America -- whose shares were also derailed by an analyst downgrade -- stood out for me among the wreckage.

A UBS analyst cited a takeover of one of FreightCar's customers, and weakening demand for coal railcars, as the primary reasons for the downgrade. The rail-car industry is as cyclical as it gets, and FreightCar has already seen its backlog for new orders decline by more than 50% during the last year. Add the fact that one of its main clients is in for a major overhaul, and things aren't looking so pretty for FreightCar in the near term. Of course, as Foolish investors, the real question is whether Mr. Market has provided us with an opportunity to profit with patience.

Our CAPS community thinks so. Here's why.

All aboard a bargain?
Despite FreightCar's less-than-inspiring outlook for the next year or so, there are a few "big picture" facts that bode well for the firm over the next five to 10 years. For one, FreightCar remains the No. 1 coal freight car manufacturer in the world, with an 80% share of the market. Given positive growth estimates for electrical demand in the U.S. -- which will require a healthy consumption of coal -- FreightCar's prospects over the long run aren't too shabby. Either way, you won't have to pay up for that growth potential.

FreightCar currently trades at about three times free-cash flow, an EV/EBITDA multiple of 2 and a P/E of 5. Really. To put that in perspective, FreightCar's lower-margin competitors American Railcar (NASDAQ:ARII) and Greenbrier (NYSE:GBX) trade at eight and 14 times earnings, respectively. More importantly, FreightCar's management has already commenced a $50 million share repurchase plan. To me, that's a sweet indication that the stock represents authentic value at these levels.

Taken all together, I'd say that FreightCar looks like a reasonable candidate to bounce back. But don't just take my word for it. Here are three CAPS contestants riding high on this RAIL:

• worCkciN: Huge competitive advantage in terms of market share that is well represented by it's high ROA. Market seems to undervalue it ... because coal is boring? I don't know? Buffet makes a killing on boring companies that generate cash!
  
  
• Needaclue7: All I can figure is that the market considers this to be a "boring" business with some cyclical characteristics that are just too much work to figure out. That makes this a classic value play, and based on their performance it would seem that there is a substantial margin of safety here.
  
  
• inl43: Enterprise value/EBITDA is under 3 which leads me to believe this stock is currently too cheap. Debt/equity is basically zero as well limiting the downside. I believe rail is a $65-$75 stock over the next year.

Now its your turn(around)
What do you think, Fool? Will FreightCar's shares finally get back on the right track, or are they on a one-way ticket to disaster? The great thing about turnarounds is that they offer an exceptional way to beat the market's returns. The catch, of course, is that they require a lot more time and effort to figure 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. Click here to get started, absolutely free. More tasty, terrific, and (hopefully) triumphant turnaround treats await.

For more CAPS-related fun:

• 5 More Top Growth Stocks
• This Just In: Upgrades & Downgrades
• Contrarian Shopping List

Foolish contributor Brian Pacampara has an ugly turnaround jump shot and owns none of the companies mentioned. The Fool's disclosure policy is always headed in the right direction.