It's fun to sift through potential turnaround stocks, to wrestle with the discards and castoffs left behind by Wall Street. You have to have a counterintuitive streak, and be willing to delve into a pile of problems to see if you can find unrecognized value.

But it's also easy to succumb to the negativity surrounding turnaround companies, as everybody seems to focus on problems. The classic mistake investors make when considering turnaround stocks is to project current problems into the future. Problems are often cyclical, and the prudent investor should consider taking a position with the expectation that things will improve.

If you are considering investing in a turnaround, don't bother with Wall Street research. It will only confuse and distract you from the analysis you need to do. How intractable are the problems and issues facing the company? Are they permanent or temporary? Is the balance sheet in good shape? What about the competition? By far the most important question: Is the price of the stock well below fair value?

My Top-10 Turnaround list has lapped the market a few times over, with five of the 10 stocks up more than 20% since the column appeared Dec. 28, including two that are up more than 50%. The only stock of the 10 that's down (slightly) is H.B. Fuller (FULL:Nasdaq - news - boards).

Fuller Up?

As management explained a few days ago in the quarterly conference call, business is bleak at this leading adhesives company. Fuller's struggles have all the hallmarks of a recessionary phase, with anything and everything going wrong. High raw materials costs, led by a rise in natural gas prices, a slow economy and a weak euro are teaming up to drag down sales and earnings.

It's a Buying Opportunity The cyclical problems H.B. Fuller is experiencing will go away soon enough

What should an investor do in light of Fuller's problems? Buy! Fuller has an enviable record of profitability going back more than 15 years, and a strong balance sheet. The cyclical problems it's struggling with will go away soon enough. In the last recession in 1990, despite a terrible business backdrop, Fuller stock rallied 60% from about two months into the recession until the end of the recession. Expect a similar rally this year.

Here's one more turnaround candidate for you to consider that's not on my Top-10 list. But, as always, beware! Conditions at this company are not only bad, they're awful (just the way I like it).

Safeco a Good Risk?

Readers can never accuse me of hyping stocks that are already up 50% or 100%, as I consistently recommend stocks near their lows. Here is a stock trading at a level it first reached 10 years ago. Safeco (SAFC:Nasdaq - news - boards) is an insurance company, with products in property casualty, life and health insurance. You can buy this conservatively managed company at about $24 per share, down from an all-time high of $56.

Go With Safeco Things look terrible now, but expect a 60% gain over the next year or two

While earnings have been hammered by a multitude of problems, each of the issues Safeco is dealing with are solvable and temporary. While Safeco has been a profitable company for as many years as you want to go back, it has lacked consistency. The most profitable metric that I've used, when dealing with the fickle earnings streams of insurers, is to target a price multiple based on tangible book value.