Three Stocks With High Recovery Potential

On several different occasions I have written about using the Piotroski score to help identify value stocks with significant recovery potential. The score is simply a measurement of nine key balance-sheet and income-statement items to determine not just the financial health of a company but its recovery potential.

It was developed by Joseph Piotroski and tested in his 2000 paper "Value Investing: Using Historical Financial Information to Separate Winners From Losers." Stocks that score in the highest ranges of the system significantly outperform those that have lower scores when combined with the basic value approach of low price to book value.

I have found that the method works very well in practice as well as in theory. I sat down this weekend and ran some screens to find stocks that have high scores on the Piotroski scale and trade below book value. Being me, I also screened for those with solid balance sheets in addition to being cheap. I believe these companies will be among the market leaders when the stock market finally recovers next year.

Tecumseh Products (TECUA - commentary - Cramer's Take) is a stock I owned several years ago and am going to revisit now that it shows up on my screens. The company makes compressors, primarily for the refrigeration and air conditioning industries.

Given the current weak environment for manufacturing of durable goods, it comes as no surprise that business has been weak in 2008. Sales and earnings are both down compared with 2007 as a result of the economy. However, the company does have a solid balance sheet, with over $7 a share in cash and very little debt. Tecumseh was involved in a shareholder rights battle with a large shareholder, the Herrick Foundation, but it successfully beat back a proposal from Herrick at a recent special shareholders' meeting. Tecumseh will be recapitalizing the company to eliminate the dual share class and equalize voting rights.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.