One way to do that is to shop for companies that have been losing money but are showing signs of profitability – "turnaround" stocks, I like to call them.
The ideal turnaround stocks will surprise to the upside and return long-term profits.
But there's more to it than a rebound in profits and revenue – the best turnaround stocks to buy also have undervalued share prices.
For example, investors wouldn't want to buy stocks like Tesla Motors Inc. (Nasdaq: TSLA) and Delta Air Lines Inc. (NYSE: DAL), even though they indeed have analysts' blessing and are likely about to see their bottom line substantially improve.
But these are not ideal stocks to buy for individual investors for two reasons: 1) They have both seen share prices skyrocket this year, with their stock up 444% and 102%, respectively, and 2) are already heavily owned by institutional investors.
Plus, Tesla-type stocks are far more likely to suffer an earnings shock than an earnings pop at this point because everyone expects them to turn profitable and enter a growth phase. If their earnings disappoint even slightly, investors' exit will be abrupt as large funds withdraw.
So, investing in rags-to-riches stocks means choosing those that are not mainstream.
That means look for stocks that are braced to enter a strong growth period but are under-owned by the large institutions. Then, when the larger institutions do recognize their financial strengths, your portfolio will be well positioned to enjoy the surge in stock prices.
Here are two "turnaround" stocks to buy that fit these criteria.