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One style of investing that is underutilized by most investors hunting for stocks to buy is picking up "turnarounds."
You see, we all know investors who have gotten caught up with buying what is popular, at the height of its popularity. The Peter Lynch adage about buying what you know has investors chasing stocks like Apple Inc. (Nasdaq: AAPL) or Lululemon Athletica Inc. (Nasdaq: LULU) because they like the products regardless of valuation.
Buying stocks of companies that have experienced serious problems and fallen out of favor with Wall Street requires more work and attention than just buying the stocks talked about on TV or around the office - but it can be far more lucrative as well.
A stock that recovers from operational of financial difficulties can soar in price over a few years.
Buying into turnaround stocks requires investors to abandon the short-term focus that dominates Wall Street. Today's price movement and chart pattern are not as important to the analysis nor is the quarterly earnings estimate that is so near and dear to most investors.
Instead, spotting potential turnaround stocks to buy now involves finding a company with the long-term ability to survive and eventual thrive after a period of distress.
The important questions to ask when looking at fallen stocks with turnaround potential are how did this "stressful" period happen, and can it be fixed?
One thing to note: Turnaround investing works best for patient long-term investors with an aggressive approach to risk taking. Because of the potential for large asymmetrical payoffs you do not have to be right all the time, but with a little attention to detail you can be right most of the time and earn high long-term returns.
Our payoff on a turnaround comes in three to five years, not at the 4 p.m. close of today's trading. The movements of the stock market are not as important as changes in conditions and operations at the company level. Market movements can be ignored unless a severe decline creates an opportunity to add more shares of a turnaround at more favorable prices.
Taking all this into consideration, I found two possible stocks to buy for investors looking to play a reversal...
Two Turnaround Stocks to Buy Now
Synovus Financial Corp. (NYSE: SNV) is an excellent example of a potential turnaround stock.
The bank has branches throughout the Southeastern portion of the United Sates with offices in Georgia, Alabama, South Carolina, Florida and Tennessee. In all they have 261 branches and just over $21 billion in assets.
The stock has been ravaged over the past few years falling from over $30 a share before the real estate and credit crisis to less than $3 today.
What happened is very easy to determine. The Southeastern portion of the country was among the hardest hit in the banking crisis and Synovus struggled with a flood of nonperforming loans. Credit costs were enormous and loan demand shriveled, causing profits to disappear and losses to mount. The bank has lost money for five years in a row as a result.
The "can it be fixed?" question is a little harder to determine, but it appears that the answer is a resounding yes.
Credit problems are beginning to recede and loan demand is picking up slightly with the slowly healing economy. Nonperforming loans were almost 6% of total loans in 2010 and are now at just 2.57%. The bank has adequate capital and may be in a position to pay off its TARP loan later this year.
It is not all smooth sailing, as the bank may have to do an equity or preferred offering in conjunction with TARP repayments and net interest margins are compressed by Fed policy. These can be overcome however and this stock could easily grow to three to five times its current share prices in the next few years.
Felcor Lodging Trust Inc. (NYSE: FCH) is a little further along it its turnaround process, but the stock still has tremendous upside.
The REIT was highly leveraged as the credit crisis hit and took on additional debt during the early stages of the economic slowdown. The hotel business was hit hard and Felcor saw revenue and earnings plunge. Management is in the process of restructuring the REIT by selling 39 noncore properties and using the proceeds to pay down debt and improve remaining properties.
So far 19 hotels have been sold and 11 more are being marketed. These should be sold by year end resulting in proceeds of $275 million. The company refinanced debt that will not be repaid and lowered total interest expense by over 100 basis points. Conditions are improving rapidly and the company is expected to reinstate a dividend payout by the end of 2013.
The company anticipates strong revenue and earnings growth from its recently acquired or redeveloped properties in strong markets like Boston and New York. As management continues to execute its turnaround plan this stock could also see gains of three to four times the current stock price over the next few years.
For more rebounding stocks to buy now, check out How to Find the Best Undervalued Stocks to Buy Now