5 Top Turnaround Stocks

Everyone loves a comeback story. And in the stock market, few things are more enjoyable than owning a stock on the cusp of a massive turnaround. Many fortunes are made by the investors who succeed in buying great businesses:

• In times of maximum pessimism
• While they're being ignored and forgotten
• When they're being beaten down to bargain-basement levels.

Meet the turnaround tycoons
Those investors are able to do so because they see what other investors don't. 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, Lampert, 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 25% or more over the past year, have received a four- or five-star rating (out of 5) from our pool of individual and professional investors. In its first year, CAPS' highest-rated stocks, on average, have topped the market.

So, without further ado:

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

The silk railroad
Nothing should get investors more excited than when the shares of an attractive company take a tumble. Last October, for example, Guangshen Railway was highlighted as one of CAPS' top-rated Asian stocks, but as my Foolish colleague Todd Wenning noted at the time, the company's valuation seemed steep.

Well, after eight months and a nearly 50% price decline, Fools finally have the chance to jump aboard Guangshen at more reasonable, possibly even bargain, levels.

As Todd mentioned, Guangshen's price-to-earnings (P/E) ratio was nearly double that of its U.S. counterparts Burlington Northern (NYSE:BNI) and Union Pacific (NYSE:UNP). But thanks to the well-documented strength in U.S. railroad stocks, and Guangshen's weakness ever since, all three companies currently trade at roughly the same P/E. And of course, our CAPS members are just as fond of Guangshen's financials, competitive advantages, and growth opportunities today as they have been in the past.

For those unfamiliar to the Guangshen story, it is the sole railroad company operating between Guangzhou and Shenzhen in China's Pearl River Delta (a.k.a. the busiest route in the country). That description alone should at least have you thinking about the intriguing bounce-back possibilities, so here's a pair of bullish CAPS comments to help you aboard.      

CAPS player NetscribeServcs likes the big picture:   

The demand for railway transportation is expected to remain strong with the robust economic growth in China. The growth in rail transportation is much below the economy growth. The Chinese Government is investing approximately $12.8 billion by 2020 to expand the railway network by 35%. Tracks are being built, but at a slower pace and China is witnessing a rise in demand for rail transportation.

CAPS All-Star kamp2 touches on Guangshen's seemingly limitless growth potential: 

Miles and miles of space. Millions upon millions of people. Tons upon tons of freight to transport. New frontiers wherever they need to go. Railways will get them there first and it's going to happen fast. GSH will be the road to ride in CHINA.

Now, it's your turn(around)
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 out. But, with the help of more than 105,000 fellow Fools in our community, you'll have a head start in spotting some of the more probable plays. So, click here to get started, absolutely free.

More tasty, terrific, and (we hope) triumphant turnaround treats await.