Turkeys That Could Fly in '05

Editor's note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com. He's also a regular contributor to RealMoney, TheStreet.com's subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

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As investors gather for the holidays, they can be thankful to corporate America this year for delivering a bounty of golden turkeys to consider for their 2005 dining pleasure.

Some of the worst stocks of one year, my research shows, do very well in the following year as inept managers are dismissed and botched strategies are abandoned. And because these stocks are surrounded by a thick fog of distaste and skepticism, there is usually plenty of time for risk-taking traders to take advantage of their recoveries early on.

How can you tell the difference between the turkeys that will find their wings and fly and the ones bound to remain firmly on the ground?

It isn't easy. Very often it's only at the moment of maximum pain that boards of directors finally face up to their failure. Those moments are sometimes a crucible for future success, but they are excessively investment-repellent at the same time. In other words, stocks are often at their best when they look their worst.

The Texas-based utility TXU (TXU), one of the year's top-performing stocks, saw its fortunes turn around in mid-October 2002. It happened a few days after the company slashed its dividend and announced it would trail analysts' estimates for fiscal 2002 and 2003.

Who would want to buy on a day like that? In the 45 days from Sept. 1, 2002 to that mea culpa on Oct. 15, 2002, TXU shares had fallen 74%. The company appeared to be on the ropes.

Since then, TXU is up 472%; the S&P 500 has gained 33% in the same stretch. It has gained far more than such glamour stocks as Starbucks (SBUX), which is 150% higher, and eBay (EBAY), up 242%.