Three Turnaround Candidates

03/13/2008 12:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of the Turnaround Letter, says the recent downturn in the markets has created opportunities in good companies whose stocks are beaten down.

We cannot deny that the stock market has been pretty ugly for the last several months. You have to go back to the dark days of 2002 to find a comparable period of market weakness.

Often, however, big market declines can provide good opportunities for turnaround investors. When mainstream investors panic, they bail out of both good stocks and bad, often leaving the good stocks at what turn out to be bargain prices. With that in mind, we searched for battered gems in the industry groups that have performed the worst since the October high.

The worst performing groups over that period have been (starting with the worst) surety & title insurance; mortgage investment; toys and games; memory chips; jewelry stores; credit services; real estate investment trusts: hotel/motel; networking & communication; and office supplies. [Here are some companies from these groups] that we think have the best rebound potential without excessive risk.

Fidelity National Financial (NYSE: FNF) (surety & title insurance) is one of the nation's largest title insurance companies. Even though title insurance is lumped together with mortgage and bond insurance, it is a very different business. While revenues in the title insurance business are tied to the volume of transactions in the residential real estate market, the risks being insured are very different from those of other companies that have been more justifiably punished by investors such as Ambac, MBIA, and MGIC. Fidelity National is much more likely to survive and prosper. While we wouldn't swear to its permanency, the nearly 7% dividend yield is enticing. (The stock closed above $16 Wednesday-Editor.)

Host Hotels & Resorts (NYSE: HST) (REITs: hotel/motel) owns some 119 luxury and upper-scale hotels, including Marriott, Ritz-Carlton, and Hyatt. The quality of its properties bodes well for the long term, but investors have been hesitant to buy the stock as recession fears have risen. As a result, the stock is down more than 40% from its 2007 high. At current valuation levels and a 4.7% dividend yield, Host Hotels might well be a luxurious place to park some money. (It closed below $17 Wednesday, not far above its 52-week low-Editor.)

OfficeMax (NYSE: OMX) (office supplies) staved off significant shareholder unrest in early 2006 with the launching of an aggressive turnaround plan that included closing underperforming stores and improving the company's supply chain and information systems. The stock rallied, but beginning in February of 2007, the stock commenced a slide that culminated in a nearly 67% drop by mid-January 2008. Investors are worried that an economic downturn will curb spending by small businesses. While that may hurt short-term results, OfficeMax is well positioned for the long haul as its turnaround program gains further traction. (It closed below $21 Wednesday-Editor.)

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