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Should You Bet on These Turnaround Stories?

Saturday - 4/13/2013, 12:21pm  ET

Companies and businesses are sometimes written off too quickly and afterwards make dramatic turnarounds; sometimes the returns are often super-normal when the company's stock soars as new (or existing) management turns things around.

U.S. truckmaker Navistar , Internet radio service provider Pandora  and Gap  are among such turnarounds that should be watched closely by investors seeking exceptionally good returns.

EPA kills Navistar?

Navistar is a producer of commercial and military trucks, buses, and diesel engines. The stock was trading at $24 at the start of the month; however, fast forward a week and the price has advanced more than 40% with a market price of $34. To put things into perspective, the stock’s 52 week range, between $18 - $43, does not appear to be of a steady performer.

The company lost investors’ confidence big time when the U.S. Environmental Protection Agency refused to approve its new diesel engine in last August. In a marked departure to what the rest of the industry was doing, Navistar was trying to reduce emissions of nitrogen oxide without using the additive urea.

The company has now abandoned that plan, and instead it is developing a new model that uses emission controls more in line with industry standards. However, it is paying a hefty fine of $3,744 for every engine that does not meet current emissions standards. As history tells us, order books of companies with questionable prospects go for a toss and Navistar was no exception. As a result, the stock price of this iconic manufacturer sunk to new lows last year.

However, there appears to be a transformation taking place lately. In the latest quarter, the company reported that its net loss was reduced to $123 million from $153 million. During the quarter, it incurred $10 million in non-conformance penalty charges on engines. Although the loss from continuing operations before income taxes stood at $84 million, it was lower than the year ago figure of $207 million.

However, top line growth still remains elusive as revenue declined 13% to $2.6 billion. The financial performance, despite the lower top line, is indicative of the efforts Navistar is making in controlling costs. In addition, what also worked in pushing the stock up was the appointment of its chief operating officer to CEO indicating a full-time expert will now be leading the rescue mission.

Pandora: Buy on the bad news?

Similarly, Pandora stock was up at one point more than 15% in last Friday's trading session after the company reported financial results which exceeded market expectations. Although the net loss widened to $14.6 million from $8.18 million, excluding exceptional items it came ahead of analysts’ consensus.

Revenue growth of 54% also cheered investors and so did the announcement that chief executive Joseph Kennedy was stepping down. As a result, Piper Jaffray upgraded the stock to overweight from neutral while many other brokerages increased their price targets.

GAP cool again?

Specialty apparel major Gap also reported encouraging results, effectively continuing a turnaround that included a change in its top management. In the latest quarter, profits grew 61% to $351 million as revenue jumped 10.5% to $4.7 billion.

This improvement in key metrics has led to an increase in annual dividend to $0.60. For the full year, the company expects its operating margin to grow to about 13% from about 12% last year. Coming from a background when it was accused of selling boring clothes, the company seems to have finally got it right as soaring revenues would testify.

Foolish bottom line

Overall, the gains in these stocks have just started to trickle in and there appears to be much steam left in them before the stock price growth hits a plateau. Such turnarounds often result in a series of quarterly results with marked improvement from the previous year. Now may be the time to buy.

This article was originally published as Should You Bet on These Turnaround Stories?on

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