Don't Count These Beaten-Down Stocks Out

The market keeps shrugging off bad news and moving higher, as even the first 1% drop this year couldn't keep indexes from ending last week in positive territory. But a rising tide hasn't lifted all boats. Some stocks just can't seem to shake off their doldrums and gain with the rest. That doesn't mean that all the depressed stocks are in bad shape -- some could be poised to break out when a better picture comes into focus. Are you ready for it? Let's take a look at some stocks that deserve more love than the market's giving them lately.

Down, but not out
Stocks can decline for a number of reasons, but it's important to distinguish between those in a temporary funk and those whose low price hides a value trap. I made sure to look for companies that hid potential behind a poor past-year performance, and which are expected to grow at a solid clip going forward. Here's what came up on the radar:

Source: Finviz.com. NM = not meaningful due to negative earnings.

A bright light?
The solar sector has not been treated kindly by the market coming out of the 2008 crash, but SunPower is doing better this year than most of its peers. Considering how far it's fallen, that's a bit like cheering on the last unflattened car at a monster truck rally. Despite the carnage, there are reasons to believe the solar panel maker can succeed where its competitors may flounder.

Resident Foolish solar expert Travis Hoium has repeatedly pointed to SunPower's superior panel efficiencies, which provide a critical differentiator in a crowded market in which manufacturing costs continue to plummet. That's giving the company a lead over former solar standard-bearer First Solar (Nasdaq: FSLR). After the two companies' divergent earnings releases showed SunPower moving forward while First Solar is fading, there's reason to believe that positioning itself as the best technology is a long-term gamble that will pay off.

There will always be competitors, but they'll still have to outpace SunPower in efficiency and undermine its diversification into distributed generation. Even if projected growth seems optimistic, there's no denying that SunPower's been left for dead with the rest of the solar sector. That, my Foolish friends, looks like a mistake.

One nutty pick
Oh, Diamond Foods -- where to begin? It seems so long ago that the market was hailing the snack seller's string of successes. Diamond has had an absolutely brutal six-month stretch. It's lost three-quarters of its market cap thanks to a string of major bungles, which hinged on an accounting scandal that's now led to its CEO's ouster and the loss of a hugely beneficial Pringles acquisition, which Procter & Gamble decided to sell to Kellogg in the aftermath of Diamond's fall from grace.

Investors were clearly hoping that the Pringles deal would put a bit of sparkle in Diamond's future earnings, but now there's tremendous uncertainty swirling around the company's accounting practices. How bad is it? The Department of Justice is now investigating the irregularities, which could depress stock prices for some time, especially if the truth winds up even uglier than early reports indicate. There's still a great deal of risk to take on with this stock -- more than this Fool is willing to take on today -- but Diamond was already a solid growth story prior to its problems. I'll be giving Diamond a three-year thumbs-up in CAPS, but I expect it may be a while before my high hopes pay off.

The little engine that could
Looking for something cheap? It doesn't get much cheaper than Navistar, with a P/E barely nudging into the single digits. But last year brought an unexpectedly big bounce in net income -- almost eight times 2010's take -- that's skewed the numbers in Navistar's favor. If income had stayed at the same levels, the company might instead sport a P/E around 13, which is quite respectable, but not particularly compelling for deep value investors.

Foolish analyst Anand Chokkavelu crunched the numbers on Navistar's rock-bottom P/E and found that the company's in line with its peers when discounting the huge one-time boost. Yet Navistar's sorely lagged the rest in terms of returns:

Navistar International Corporation Total Return Price Chart by YCharts

There are a few positive possibilities to keep your eye on, though. Navistar intends to push into the Indian and Brazilian markets, which could drive growth for years as those countries build out. Navistar's also working its way into natural gas trucking, partnering with Clean Energy Fuels (Nasdaq: CLNE) to build out the infrastructure that customers are clamoring for. Navistar won't be able to generate huge earnings like 2011's every year, but branching out now makes it a good option for both international investors and natural gas boosters.

Foolish final thoughts
I've given each of these companies outperform ratings in Motley Fool's CAPS, with Diamond earning a three-year bullish pick and the other two on the clock for five years. If you think I'm right or wrong, let me know with a comment. If you're looking for other great opportunities, The Motley Fool has put together a new report that explains our top stock for 2012 and what makes it such a great buy today. The report is free, so claim your copy now to get all the information you need to add another big winner to your portfolio today.