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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…