Three Stocks With High Recovery Potential

Editor's note: This was originally published in two parts on RealMoney. It is being republished as one article as a bonus for TheStreet.com readers.

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. ...