This Underused Strategy Has Led Me to Some of the Best Investments Ever

One of the most successful ways to uncover the best investments for the long term is picking turnarounds.

This active investment approach - when done right - has powered record returns for many successful investors. Private equity funds have generated massive returns this way.

In spite of this, it remains underutilized by most individual investors.

True, turnaround investing is not for everyone. There are some reasons people tend to shy away from it...

First, finding the best turnaround investments requires more patience than trading or flipping stocks over the short term. A turnaround stock usually takes a full market cycle, or three to five years, to show results.

Second, you have to be prepared to live with price volatility. There's often high volatility during the turnaround period.

Also, it's highly unlikely you will time things so perfectly that the stock doesn't slip more before it climbs higher.

However, if you have the patience and money to play with, turnarounds can be some of the best investments you'll ever make - and provide the type of returns most short-term investors will never realize.

As outside investors we can't have the same influence on a stock's price as a large hedge fund or private equity investor would when it took a stake in a turnaround. But, we can still own a diversified portfolio of turnarounds with strong potential. A batting record of .500 or higher in your selections should lead to spectacular returns over time.

Looking at the market now, I picked a few companies that have the potential to be the next best "turnaround" investments out there.

Here's that list, along with why they look so appealing...

Best Investments 2013: Three Turnarounds with Long-Term Potential

My first turnaround investment is an engineering and construction company that builds complex offshore platforms for the oil and gas industry. It constructs floating and fixed facilities, as well as pipelines.

I'm talking about McDermott International (NYSE: MDR).

The company has seen earnings fall since 2007 from $2.66 to what might be $.40 per share this year.

The stock has fallen over the same time from above $60 per share to less than $9 today.

The near-term outlook for business is moderate, with backlogs staying fairly stable at around $5 billion.

However, here's why I'm keeping my eye on this one...

Global demand for oil and gas is going to increase over the next five years as will demand for offshore drilling and storage facilities.

Earnings should better than double in 2014 and could easily be back above the $1.50 mark in five years. A stronger economy that leads to higher oil and gas prices could push that number closer to $2.00. The stock can easily sell at three to four times the current price at some point over the next five years, giving patient investors a solid return on their investment.

LSI Corp. (Nasdaq: LSI) is another company with results suppressed by a weak economy. It currently trades around $7 a share.

The company makes semiconductors for the storage and networking markets. The continued contraction of the personal computer and hard disk drive markets has continued to hurt LSI's earnings.

There are signs now that excess supply in these markets is being worked off and the business will stop declining. Sales should finally begin to grow again in 2014 according to most analysts and industry observers.

This combined with LSI's renewed focus on the fast growing flash drive market should allow them to resume stronger earnings growth over the next few years. The company's new hybrid drive products are expected to be well received by cloud computing, Web providers and other segments of the industry.

As the company continues to introduce new products and the PC markets stabilize LSI should be reporting record profits. After several years as a lagging issue the company could become a growth leader over the next market cycle and reward patient investors.

Finally, Casella Waste Systems Inc. (Nasdaq: CWST) remains a favorite of many turnaround investors.

The company has seen weak results as a result of the fragile economy in its operating regions. Landfill volumes have been down, and the pricing of recycled products has been very weak.

At $4.84 a share, the stock is about one-third of where it was in 2008.

But as the housing market recovers and new construction and home refurbishing picks up, so will Casella's business. Increased building will generate substantial waste volumes.

Consumer spending growth will also help.

The company has a valuable collection of assets, including 17 recycling centers, 10 landfills, 31 transfer stations and four waste-to-energy operations.

If an improving economy allows management to focus on their goals of producing free cash flow and paying down debt, shares of Casella could provide patient, disciplined investors with monster returns. This stock could easily double or more over the next several years.

Is turnaround investing not your thing? Or do you just want to read more of our best investments? Either way, we are giving all our Money Morning members our roundup of three of the best investments for high yield - take a look, it's free!

About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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