Stocks: Trawling for Turnaround Targets

There are legions of beaten-down stocks out there. We went hunting for some with solid chances of rebounding this year

by Ben Steverman

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John Travolta in Pulp Fiction. Harry Truman toppling Thomas Dewey. The 2004 Red Sox overcoming a 3-0 deficit vs. the Yankees. There's nothing more compelling than a good comeback story—especially in the stock market.

Wall Street history is full of examples of companies that somehow found a way to revive their fortunes even after their shares hit multiyear lows. But for every stock that pulls out of a nosedive to reach new heights, there are many others that never really recover.

But who doesn't love an underdog? BusinessWeek went looking for stocks that might be due for a comeback. We started by checking out some of the least popular companies on Wall Street—outfits with stocks that have tumbled 20%, 30%, or more in the past year.

These depressed share prices are a sign of how far these companies have fallen in investors' eyes. But the dirt cheap stock prices can also attract bargain-hunters. If these firms can restore even a fraction of their former glory, the returns for shareholders will be huge. Amid the glimmers of hope, of course, challenges remain: Turnaround plans can be tricky to pull off, and a deeper-than-expected U.S. economic slump could prove insurmountable.

Combing for Comebacks

But how do you find comeback candidates among the many stocks that have performed poorly over the past year?

One strategy is to look for strong brands that are just starting a makeover. Starbucks (SBUX) founder Howard Schultz recently returned to the job of chief executive to renew the chain's focus on coffee. New espresso and brewing machines, new coffee blends, and a loyalty program are all planned. With a tough economic environment, Starbucks "has its work cut out for itself," McAdams Wright Ragen analyst Dan Geiman warned. "But these initiatives represent, in our opinion, a solid effort and should provide the basis for a stronger future."

Investors can also look for innovative, well-respected companies that nonetheless have been hurt by broader economic forces. Whenever the economy revives, they're likely to benefit, and they will probably fare better than rivals that aren't run as well.

Department store operator Nordstrom (JWN) has been punished by the stock market as consumer spending has slowed. But the chain is still a favorite of upper-income and younger shoppers, and it still has room to grow into new markets across the U.S.

Commercial real estate firm CG Richard Ellis Group (CBG) has also been hurt by worries about the economy. But the firm earned record profits last year, and it has international businesses, making up about 40% of revenue, that may help insulate it from a U.S. recession.

Sometimes a crisis can keep investors away from a company's stock for years. When the storm clouds finally lift, the firm can get back to what it does best: make money. That might be the case for the Interpublic Group of Companies (IPG), a marketing and advertising firm that suffered through years of accounting problems, the legacy of hundreds of acquisitions the firm made in the 1990s. In late 2007, Interpublic became compliant with Sarbanes-Oxley regulations. Now, investors hope management can fully focus on boosting profits. That won't be easy, of course, with the industry facing economic headwinds.