One of the best ways to make money in the stock market is to spot stocks to buy with high growth potential before Wall Street and the big investment firms recognize these budding winners.
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.
Stocks to Buy: This Real Estate Co. May Soon Hit the Spotlight
Realogy Holdings Inc. (NYSE: RLGY), a real estate services company, is a perfect example of a turnaround stock to buy that could soon welcome a surge in institutional appetite that would drive its shares higher.
Realogy offers real estate and relocation services in the United States and internationally. The company franchises some of the leading names in real estate brokerage, including Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA, Sotheby's International Realty, and Better Homes and Gardens Real Estate.
Reology has 3,600 offices worldwide in 102 countries and territories and about 238,900 independent sales associates worldwide.
The company also owns a real estate brokerage division that operated under the Owned Real Estate Brokerage Services segment. It owns and operates a full-service real estate brokerage business under the Coldwell Banker, Sotheby's International Realty, ERA, Corcoran Group, and CitiHabitats brand names.
Realogy has been losing money lately, but analysts expect it to show positive earnings next year. The consensus analyst estimate of five-year earnings growth for the real estate firm is 22%, and the company appears ready to enter a boom phase as real estate markets improve. In spite of the anticipated strong growth, institutional investors own just 54% of the shares outstanding.
Stocks to Buy: Multi-Fineline Electronics Still Undercover
Multi-Fineline Electronics Inc. (Nasdaq: MFLX) is another one of these ideal turnaround stocks to buy. This company is anticipated to stage an earnings breakout and enter a strong growth phase, analysts say.
Based in California, Multi-Fineline engineers, designs, and manufactures flexible printed circuit boards and related component assemblies for the electronics industry. It works with original equipment manufacturers and electronic manufacturing service providers in the electronics industry for applications such as mobile phones and smartphones, tablets, consumer products, portable bar code scanners, data storage, and medical devices.
So, Multi-Fineline is among great rebound stocks to buy because it's ready to benefit from increased consumer spending for consumer electronics and pent up demand for business IT products over the next several years.
In fact, Multi-Fineline is expected to turn a profit in 2014 after losing money this year. And its earnings growth for the next five years is anticipated to be 20% annually.
Yet in spite of this bright outlook, large institutions and other big funds own just 33% of this stock outstanding right now, making it the perfect time to add it to your list of stocks to buy now.
As the improvement at Multi-Fineline attracts more attention, the buying pressure from these large investors could easily push the stock price substantially higher in 2014 to provide savvy investors with a nice return.
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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.