Wanted: The Next Round of Top-10 Turnarounds

My Top-10 Turnarounds for 2002 column is only about seven or eight weeks away from publication, so it's time to begin culling for candidates. I plan to identify 40 to 50 reasonable ideas by Nov. 1, eventually paring the group to 10 by mid-December.

Want to participate? If you have a turnaround idea that you want me to consider, please send an email. Here's an idea of what I'm looking for.

1. Small- and mid-caps: While many big-cap stocks have fallen enough to represent reasonable value, I continue to find the most exciting value in stocks with market caps of less than $5 billion. I'm going to avoid small stocks with values of less than $200 million for liquidity reasons.

2. Financial strength: I have to live with the Top-10 Turnaround list for a full year, so I won't consider companies without staying power. Balance-sheet strength is required.

3. Relatively stable revenue: I'm not going to bet on a company where revenue is in a severe downtrend. While most companies are suffering some diminution to their sales bases, declines of more than 20% represent too much risk for me.

4. Clean accounting: In general, I think accounting is getting worse, not better. If there's even the slightest hint of aggressive accounting, like extraordinary charges that belong in operating results, I'll look elsewhere.

5. An identifiable lever for price appreciation: I'm looking for turnaround stocks in which there is an identifiable catalyst that can spark a rebound. Of last year's picks, for example, both Hasbro (HAS) and Office Depot (ODP) were in the midst of a series of operational changes geared to lifting operating margins.

6. An edge: Of the columns I've written here, my favorite is Give Me an Edge -- Or I Won't Play. Unless I can clearly identify something the market is missing, somewhere I think I have an edge, I'm not going to play. For example, I believe the market missed the intrinsic value of Eckerd last year when it punished J.C. Penney (JCP) for sales weakness in its department stores.

Making It Interactive

Do you have a turnaround idea that might fit the parameters? The best idea that I received last year -- from several readers -- was Rite Aid (RAD), a company I strongly considered including on the list. I passed on Rite Aid because of its hefty debt load and because I already had a drugstore position with J.C. Penney, which owns the Eckerd chain. My compliments to the readers who suggested Rite Aid because it has outperformed all of my picks, rising more than 200% since the Top-10 column was posted. If you have a pick that you think is poised to perform like that one, let me know. I'll look at every idea, and maybe, just maybe, I won't miss a turnaround like Rite Aid this time.

Here's the performance of my Top-10 Turnarounds for 2001 so far this year. Every one has outperformed the S&P 500, which is down about 18% for the same period. Note that I recommended the sale of UAL (UAL), Raytheon (RTN) and Circuit City (CC) in an Aug. 27 column. Circuit City is listed twice because I recommended repurchasing it in a Sept. 18 column.

Top-10 Turnarounds' Performance These stocks have significantly outperformed the S&P 500
Stock	Date of Pick	Price at Pick	Oct. 22 Close	Gain
Circuit City (CC:NYSE)*	12/28/00	$10.80	$16.84	55.93%
Circuit City (CC:NYSE)**	9/18/01	9.91	13.82	39.46
UAL (UAL:NYSE)*	12/28/00	35.88	33.85	-5.66
E*Trade (ET:NYSE)	12/28/00	7.34	7.74	5.45
J.C. Penney (JCP:NYSE)	12/28/00	10.25	24.00	134.15
Raytheon (RTN:NYSE)*	12/28/00	27.50	27.74	0.87
TRW (TRW:NYSE)	12/28/00	36.38	32.50	-10.67
Georgia Gulf (GGC:NYSE)	12/28/00	15.00	17.65	17.67
Hasbro (HAS:NYSE)	12/28/00	10.06	17.67	75.65
Office Depot (ODP:NYSE)	12/28/00	6.94	14.25	105.33
H.B. Fuller (FULL:Nasdaq)	12/28/00	40.31	53.02	31.53
Average Return:				42.36%
S&P Return:				-18.38%
*Recommended sale in Aug. 27 column. **Recommended repurchase in Sept. 18 column. Source: Alsin Capital Management

>To order reprints of this article, click here: Reprints