Everyone loves a great comeback story. And in the stock market, few things are more satisfying than owning 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:

Meet the turnaround tycoons
Those investors succeed 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, 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 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:


1-Year Return


Vaalco Energy (NYSE:EGY)


Oil and gas

PeopleSupport (NASDAQ:PSPT)


Outsourcing services

Rudolph Technologies (NASDAQ:RTEC)


Scientific and technical instruments

FreightCar America (NASDAQ:RAIL)



Safety Insurance Group (NASDAQ:SAFT)


Property and casualty insurance

A word of caution: These stocks have been beaten down for 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.

People still support
One of my favorite things to do when I'm on the phone with a customer service rep is to ask them what country they're helping me from. I know what you're thinking -- I really need to get out more often, right? Yes. Yes, I do. Nevertheless, I've been having more and more of these conversations right in the reps' very own language. How so?

Because over the last few years, a massive amount of business has been, and continues to be, outsourced to the Philippines, where my family is from. So, obviously, when PeopleSupport -- one of the largest business process outsourcing (BPO) firms in the Philippines -- made it through this week's turnaround screen, I just had to give it some Foolish attention.

Currently, 122 CAPS All-Stars are bullish about PeopleSupport, with just one All-Star detractor. Now, PSPT is indeed a formal pick of our Hidden Gems Pay Dirt service, so that alone has probably created several Foolish bulls. But when you consider some of PeopleSupport's numbers, such as its 53% compounded revenue growth over the past three years, it's really tough to be skeptical of PSPT's market opportunity.

According to Gartner, the offshore BPO market is expected to grow to $42.9 billion by 2009. With the Philippine culture having certain inherent advantages in the BPO offshore business, such as its emphasis on English education and a generally U.S.-centric lifestyle, PeopleSupport looks to be in a good spot to capitalize.

Now a turnaround story wouldn't be much of a story if everything was rosy. It isn't. PSPT's stock has been battered over the past year by all sorts of discouraging events: a negative earnings surprise in the fourth quarter, lowered near-term guidance, and especially the loss of Vonage (NYSE:VG), one of its biggest customers at the time.

PeopleSupport definitely has work to do in adjusting its processes to support further heady growth. But with $101 million in cash and no long-term debt, PSPT trades at an enterprise value to EBITDA of just 10.1. Considering the massive macro trends from which PeopleSupport stands to benefit -- not to mention that companies like Expedia (NASDAQ:EXPE), Washington Mutual, and Earthlink remain among its biggest clients -- PSPT might be worth the turnaround look.  

Comments from our Foolish community ...

  • TMFBreakerThiel says, "Outsourcing = India? Not necessarily. The rising Rupee and an increasing shortage of qualified workers is making it harder for Indian BPOs to remain competitive. They are looking to other countries like the Phillipines [sic] to secure a growing workforce at low-cost. PeopleSupport is already there."
  • CAPS All-Star zyx987, meanwhile, advises Fools to keep calm: "PSPT sees an enormous opportunity and is spending the money to create a strong Provider of BPO services. It costs money to expand: IT infrastructure, facilities, and to train 100 new employees per week. ... The results of these efforts are going to be a very tidy earnings stream flowing toward investors who have the sense not to discount the obvious. A little patience is all we need."
  • Finally, awolfson1015 leaves PSPT people with some words of support: "Solid financials, strong management, money to burn, proven ability to grow and attract new business, and first mover in the Philippines outsourcing market. Granted, PSPT lost a major customer this past year (Vonage), but that was because the customer was experiencing troubles, not because of PSPT's services."

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 65,000 fellow Fools in our community, you'll have a head start on spotting some of the more probable plays. So click here to get started, absolutely free.

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

Safety Insurance Group is a Stock Advisor newsletter recommendation. Washington Mutual is an Income Investor pick. You can check out either newsletter free for 30 days.

Foolish contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy is always headed in the right direction.