5 Top Turnaround Stocks

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In the stock market, few things are more enjoyable 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...

  1. During times of maximum pessimism.
  2. While they're being ignored and forgotten.
  3. When they're being beaten down to bargain-basement levels.

Meet the turnaround tycoons
Notable investors who've followed this strategy include Warren Buffett, John Templeton, Seth Klarman, and many more.

We probably can't help you with your contrarian spirit, but we can offer you five possible turnaround ideas from our Motley Fool CAPS community. Despite being down 15% or more over the past three months, these stocks have received a four- or five-star rating (out of five) from our pool of individual and professional investors. Our candidates today:

Company

3-Month Return

Industry

Current CAPS Rating (out of 5)

Newpark Resources (NYS: NR) (20%)Oil and gas equipment and services*****
Nuance Communications (NAS: NUAN) (18%)Application software****
Cypress Semiconductor (NAS: CY) (18%)Semiconductor*****
Ancestry.com (NAS: ACOM) (17%)Internet information providers****
North American Palladium (ASE: PAL) (16%)Industrial metals and minerals****

Source: Motley Fool CAPS.

These stocks have been slammed for specific reasons, so don't view them as formal picks -- just ideas you may want to investigate further. With that said, let's see exactly why some of our CAPS members believe they're good bets to bounce back.

Growth on the cheap
With its shares down 20% over the past three months, Newpark Resources tops this week's list of losers. The small-cap oilfield services specialist has been beaten down, along with its much larger peers, in the persistent natural-gas supply glut, but many in our community believe Newpark's growth potential isn't being factored fully into the price.

CAPS member troym72explains:

Newpark's earnings indicate their stock price should be near $15 per share (depending on what level of P/E you think the stock deserves). They are in an industry that is not going anywhere. Newpark has shows revenue and earnings growth on a consistent basis. ... I am looking for Newpark to begin a rather aggressive climb.

Still speechless
In early February, shares of speech recognition technologist Nuance Communications took a double-digit drubbing after the company posted disappointing first-quarter results, and investor confidence has been shaken ever since. However, given Nuance's growing exposure to the booming mobile space, as well as its increasing foothold in the voice-recognition market, many Fools just see the pullback as a small, short-term hiccup.

My Foolish colleague Anders Bylund (TMFZahrim) elaborates:

Nuance hit a little speed bump and investors are treating it like a spike strip? Fine by me -- the company is a human-to-machine interface juggernaut that is just getting started. The long-term opportunity is larger than ever, just hidden behind those lumbering but unstoppable long-term mobile agreements.

Chips on sale
Although a drop in orders prompted Cypress Semiconductor to cut its near-term guidance last month, management reassured investors that the first quarter of 2012 will be the "bottom for revenue and bookings." That turnaround call, coupled with a juicy dividend yield of 3%, makes the stock a current five-star favorite among Fools.

CAPS member Suleymania succinctly sums up the bull case:

Impressive fundamentals, decent dividend, and beaten down. Other mid-CAP semiconductor stocks like [STMicroelectronics], [Microchip Technology] have these characteristics now also, but Cypress' has the best return on equity and lowest debt... oh, and touchscreens!

Looking into the past
While high-growth tech stocks can offer some of the market's biggest winners, they're usually the most vulnerable to significant pullbacks once that growth begins to fade. Online family history resource Ancestry.com, for example, is off 50% from its 52-week highs on slowing membership growth and rising costs, but many Fools believe its current subscriber base of 1.7 million loyal users is now available on the cheap.

CAPS All-Star quarterdollarbilexpands on the opportunity:

[F]ar cheaper than what it is worth! ... I have to ask. Who is their competitor in the field? Is there any other company providing the service that this company has been providing? This monopoly they have in the field will help grow this company as well as revenue. It's a buy.

Solid selection
Our last turnaround candidate is Canadian miner North American Palladium, whose shares continue to be pressured by the pullback in palladium prices. However, when you couple the metal's rarity with its important commercial uses, North American Palladium remains an appealing long-term opportunity.

CAPS member dgarantelaborates:

[North American] auto demand soaring. ... [S]tock was hit unfairly in 2011 because of rare earth bubblish type losses. Stock fundamentals appear to be good. Electric cars will only represent 2% of automobiles on road by 2020. Demand for Palladium will be strong for a long time. Plus e-test regulation in china will become stricter in the future.  

Now it's your turn
Turnarounds offer an exceptional way to wallop the market's overall returns. The catch, of course, is that they require a little more effort to figure out.

But if you're crunched for time, we've compiled a special free report called "The Stocks Only the Smartest Investors Are Buying," which uncovers several other bargains that the value master himself, Warren Buffett, thinks highly of. The report is 100% free, but it won't be around forever, so click here to access it now.

At the time this article was published Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Nuance, Cypress, and Ancestry.com. The Fool owns shares of Ancestry.com. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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