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TheStreet Open House

3 Turnaround Stocks to Watch

Stocks in this article: WENNOKIPSU

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Dave Sterman

NEW YORK ( StreetAuthority) -- The appeal of investing in turnaround stocks is very compelling.

Some companies look to revamp products to re-invigorate sales growth. Others find ways to slash expenses and unlock major profit-margin gains. Still, others look to clean up a debt-laden balance sheet, which is often a key reason for investors to disregard a stock. No matter the plan, long-depressed shares can get a new life as these moves pay off.

A portfolio filled with turnaround candidates is a bad strategy. Even the best turnaround plans often go askew. Still, stocking your portfolio with one or two potential rebound candidates can help you beat the market averages.

Here are three potential turnaround stocks I'm watching closely. Some of these ideas may fail to gain traction, but holding a basket of these should pay off.

1. Wendy's (WEN)

Roughly a month ago, I suggested this fast food operator's new CEO, Emil Brolick, had a great industry track record and would soon articulate an impressive turnaround plan.

In late January, Brolick delivered a clear strategy for Wendy's focused on improved breakfast results, spruced up stores and the addition of higher quality (and higher-priced) menu items. For Wall Street, this may be a hard plan to swallow. Wendy's plans to spend heavily in 2012 to transform the business, so quarterly profits will likely remain weak. The fact that beef prices are expected to rise higher in the next few quarters is just another headwind.

But turnaround investors gauge a company's plan by where it will likely be in 18 to 24 months. There's no assurance that Brolick's strategy will succeed, but even if he accomplishes only half of his goals, then investors will probably come to notice just how stunningly cheap this stock is compared with McDonald's (MCD) stock.

2. Nokia (NOK)

This is a turnaround play I profiled just two weeks ago. At the time, I wrote the upcoming launch of pricier Lumia phones would likely really captivate investor interest. Well, the Lumia 900, the company's flagship phone, is expected to make its debut at the end February at the Mobile World Congress in Barcelona. It will be curious to see how shares respond if tech reviewers give the phone high praise.

Of course the proof will be in the pudding. Will Nokia sell enough phones -- and earn enough profits -- to finally reverse a long losing streak? The current share price implies a great deal of skepticism, though these are the opportunities that offer the biggest upside. Nokia has much to prove, but a long-awaited turnaround may just take root in 2012. If Nokia can make a moderate dent in the Google (GOOG)/ Apple (AAPL) hegemony of the smartphone market, then this stock could easily double.

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