5 Top Turnaround Stocks

Everyone loves a great comeback story. And in the stock market, few things are more enjoyable than owning a stock on the cusp of a 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
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 Warren Buffett, John Templeton, Seth Klarman, 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 20% or more over the past year, have received a four- or five-star rating (out of five) from our pool of individual and professional investors.

So, without further ado:

A word of caution: These stocks have been slammed 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, Lloyds and Fuel Tech are two interesting places to start.

Bankable bounce
If you missed the glorious rally in financial stocks over the past year, Lloyds might be your chance to turn back the clock. The part-nationalized British bank has severely lagged the stock of rivals Royal Bank of Scotland (NYSE: RBS), Barclays (NYSE: BCS), and HSBC, but for many top Fools, the upturn is just a matter of time: Of the 356 All-Star members who've rated the stock, 97% are bullish.

They see Lloyds as a banking powerhouse to be. The company's purchase of toxic mortgage lender HBOS has cost it billions in loan-related losses, but bulls think the move will eventually translate into a dominant competitive position. With management expecting the company to swing to a smallish profit this year, it could happen sooner rather than later.

"Fears of [full nationalization] have dissipated, it is managing its bad debt as well as could be expected, and it has shown a real commitment to paying dividends in whatever way it can afford," CAPS member JollyViking said. "Once profits return and regular dividends are restored, the price will soar."

Fueling Fools
Fuel Tech is another stock that remains highly out of favor with Wall Street. The air pollution control specialist has showed serious vulnerability to the recession, posting a loss of $2.3 million in 2009, but Fools continue to believe strongly in Fuel Tech's future.

With increasingly stringent emissions standards worldwide, Fuel Tech's long-term tailwinds are too much for our community to ignore. The company has signed a chunk of new contracts recently, including a $12.7 million deal with a major Midwestern utility (its biggest contract ever), so earnings shouldn't remain in the red for too long.

To be sure, industrial giant General Electric (NYSE: GE), and to a lesser extent, Siemens (NYSE: SI), offers a strong alternative to Fuel Tech's technology. However, with a balance sheet of about $18 million in net cash (about 10% of its market cap), Fuel Tech still seems like a reasonably safe turnaround bet.

"Now that credit is loosening up somewhat, and the global economy is lifting, the utilities should also have the means to make capital investments," CAPS member reeshau wrote earlier this month. "With oil headed toward $90 with summer still coming, cheap coal will also look better." As coal becomes a more attractive fuel, Fuel Tech's pollution-reduction solutions should get a leg up, according to this CAPS member.

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 160,000 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.