Top Five Turnarounds for 2005

Negativity never goes out of style. No matter how ebullient the stock market gets, there will always be pockets of negativity for turnaround investors to pick through. Despite the progress in the market indices over the last couple of years, outsized turnaround opportunities are surprisingly abundant.

Here are my top five turnaround stocks for 2005.

Blockbuster

Annual earnings power for market-leading franchise Blockbuster (BBI - commentary - Cramer's Take) is at least $1.40 per share. Earnings are temporarily depressed while the company flows through large outlays to expand its video-game, movie-trading and online rental businesses.

The market will eventually recognize Blockbuster's earnings leverage. When it does, the stock will surprise the doomsayers with a quote that more closely reflects the underlying business value, at $18 per share. The stock currently trades at about $9.

Aon

No contrarian investor worth his or her salt can ignore the palpable negativity in the insurance brokerage sector. These stocks are priced as if the businesses are permanently and severely impaired. They're not.

In addition to sector negativity, Aon (AOC - commentary - Cramer's Take) has other levers in place that can be used to unlock value. For example, new management has significant cost-cutting opportunities. The cost structure is too high relative to the company's peers. Look for much higher profitability in the not-too-distant future. I expect this $22 stock to trade close to my year-end 2005 fair value target of $33.

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At time of publication, Alsin and/or Alsin Capital Management was long Blockbuster, Aon, Eastman Kodak, Six Flags and Wild Oats Markets, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail].