Editor's Note: Arne Alsin's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Dec. 12 on RealMoney.

Turnaround investing involves a wide range of companies. At one end of the spectrum are what I call hard turnarounds -- namely, situations where the company is in distress, perhaps teetering on the brink of (or already in) bankruptcy.

Big money can be made or lost depending on the resolution of hard turnarounds. Examples of companies in hard-turnaround mode include

Global Crossing

(GX)

,

Loral

(LOR) - Get Report

,

Providian

(PVN)

,

Revlon

(REV) - Get Report

,

Enron

(ENE)

and

Conseco

(CNC) - Get Report

.

At the other end of the spectrum are the soft turnarounds. These companies' stocks don't offer as much potential gain -- or loss -- as hard turnarounds. Soft turnarounds have fewer traps, fewer ways to lose and generally easier accounting issues to wrestle with.

All of my turnaround picks

last year were soft turnarounds. With last year's top 10 list up 52%, it's clear that you don't have to reach for distressed, hard-turnaround situations to generate a high return. Here are my final two picks for the Top 10 Turnarounds for 2002. They're among the softest picks on the list.

Phillips-Van Heusen

With leading apparel and shoe brands such as Van Heusen, Geoffrey Beene, Izod and Bass,

Phillips-Van Heusen

(PVH) - Get Report

is well positioned in its category. The company has a market cap of $300 million and sales of $1.4 billion, and its stock closed Tuesday at $10.96.

A Turnaround Up Its Sleeve
Phillips-Van Heusen could be poised for a nice rebound

This $11 stock hasn't broached the $20 level since 1994, but I think the business has sufficient leverage in place to make the $20 level achievable again in a couple of years:

  • Inventory Leverage: Phillips-Van Heusen stock is down from a spring high of $18 largely because of ongoing inventory adjustments at major retailers. Major customers such as J.C. Penney (JCP) - Get Report, Dillard's (DDS) - Get Report and Federated (FD) have cut apparel inventories dramatically. Phillips-Van Heusen will soon have the wind at its back, selling into a very lean inventory backdrop amid an economic upswing.
  • Brand Leverage: This company dominates the dress-shirt market with No. 1 positions in dress shirts (Van Heusen) and designer dress shirts (Geoffrey Beene). The company is leveraging that shelf space to expand via a series of licensed shirt brands, including deals with Donna Karan (DK) - Get Report, Arrow and Kenneth Cole (KCP) .
  • Margin Leverage: Earnings are expected to be $1 per share in 2002 (making the price-to-earnings ratio less than 11), but that's based on sluggish demand and depressed margins. My work indicates at least $1.50 a share in annual earnings power -- a possibility in 2003 -- making $20 a realistic target price.

Cummins

With $6 billion in revenue and a $1.4 billion market cap,

Cummins

(CUM)

, is a leading manufacturer of diesel engines for the truck, power and industrial markets. It's in a tough business to turn around, especially against a stiff economic headwind. Take a look at a five-year chart, and you can see that this stock has languished for a few years. It closed Tuesday at $38.18.

Not Much Power Here
Cummins has had a tough time gaining momentum

With a sharp focus on market position (Cummins is No. 1 or No. 2 in each of the 11 end markets that it serves) and on profitability (via a long-term "Six Sigma" program), there's plenty of margin leverage here. I think operating and net profit margins can get to 9% and 3.5%, respectively, in the next cycle (Cummins achieved slightly higher margins in the last cycle), suggesting the company has $7 a share in annual earnings power. For fiscal year 2002, consensus estimates expect the company to earn 69 cents a share.

If you believe, as I do, that you have to buy companies when they're down and out, in front of better times, then it's time to consider this company. Cummins sports a 3.1% yield and a solid balance sheet, and a ton of negativity is already priced into the stock.

Keeping track of the turnaround candidates for 2002? The full list appears in this table.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM was long Phillips-Van Heusen, Cummins, J.C. Penney, Bowne, Prime Hospitality, Dillard's, Manpower, York International, Textron, Toys R Us and Spherion, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to

arne@alsincapital.com.