investing

5 Comeback Stocks with Promise

These beaten-down companies are worth a look

In a strong bull market, it's not easy to find stocks that are down but not out. But we scoured the investing landscape and found a handful of stocks that we think are due for a comeback. Maybe they're closing the books on a corporate catastrophe or have been struggling in an unpopular industry. Or maybe they're simply misunderstood by investors. Comeback stories are inherently risky, and the timing's not always certain, but we think the stocks below will pleasantly surprise investors over the coming year. (Share prices are as of the October 4 close.)

Best disaster recovery comeback: BP (symbol BP, $42.28)

Legal clouds since the massive 2010 oil spill in the Gulf of Mexico have kept this stock hovering close to $40 for a couple of years. But the British energy giant has strengthened its balance sheet and reshaped the business to focus on assets with the highest profit margins. For instance, it got out of a troublesome joint venture in Russia in exchange for cash and an equity stake in Russian energy giant Rosneft, which took over the operation. A more consolidated, cash-rich BP should withstand the worst-case legal scenario. “Liabilities from the accident are already well priced into the stock,” says George Putnam, editor of the Turnaround Letter. Meanwhile, BP shares yield 5.1%, so you’ll be paid handsomely while you wait for a turnaround.

Best commodity-stock comeback: Peabody Energy (BTU, $17.37)

Low natural gas prices, warm winters and increasingly strict government regulations have squeezed coal companies. Peabody stock is down more than 60% since October 2011. But reports of the industry’s demise are overblown. “Regardless of the rhetoric from Washington, you can’t just turn off the use of coal overnight,” says David Steinberg, a partner at DLS Capital Management, who notes that outside the U.S., plans for new energy plants are tilted toward coal. But with coal mines having closed around the U.S. and stockpiles now below five-year averages, surpluses could soon turn to shortages, says Steinberg. “That’s the critical catalyst that will change the trajectory of these companies.”

Best consumer-stock comeback: Urban Outfitters (URBN, $36.97)

This retailer of hip fashion and home goods got taken to the cleaners when investors overreacted to ho-hum sales trends. The company reported in September that retail sales growth was trending in the mid single digits. That was enough to send the stock tumbling; it’s down nearly 10% so far this year. But in a challenging retail environment that has seen mall traffic slow, Urban’s modest sales trend qualifies as healthy, indicating sustained market share growth, say analysts at Canaccord Genuity who raised their opinion of the stock from “hold” to “buy” after the late-summer pullback. The product mix at Urban’s Anthropologie unit has had a makeover, addressing concerns about more markdowns. And the retailer is a leader in online apparel sales, where growth is on a fast track.

Best blue-chip comeback stock: Caterpillar (CAT, $84.20)

Worries about a slowdown in China are weighing heavily on makers of heavy equipment, including mining equipment, that were booming two years ago and are a drag on results now. Caterpillar shares have sunk nearly 10% since the start of 2013. Longer term, the recovering U.S. real estate market and the need for infrastructure building (and rebuilding) globally bode well. Moreover, CAT’s servicing operation, through its extensive dealer network, is a competitive advantage. In the meantime, a number of other factors will be working in CAT’s favor in coming months, according to Raymond James. Dealers awash in heavy equipment have been drawing down inventories, but that de-stocking should run its course and turn into restocking soon. In the meantime, the company is cutting costs and plans to buy back $1 billion worth of stock.

Best small-cap comeback: QLogic (QLGC, $10.66)

QLogic produces the components—adapters, switches, routers and the like—that facilitate the transmission of data between servers, networks and storage systems. The company is a leader in technology, standardized decades ago, that is favored by banks, corporations and data centers for its reliability. But it is facing challenges from recent weakness in corporate spending on information technology and also from a shift toward newer technology. QLogic’s CEO resigned in May, and a search for a new, tech-savvy (as opposed to finance-focused) candidate is under way. Long-term success will depend on successfully navigating technology shifts. QLogic’s next-generation storage products could breathe new life into the company in 2014, and longer-term shifts away from its core technology may be less disruptive (and QLogic’s customers more loyal) than the bears predict, says a recent report from Barclay’s, which recommends the stock. The company is cutting costs and has a history of share buybacks. It also boasts a strong balance sheet, with no long-term debt and cash equal to $5 a share—making it an attractive takeover candidate. The stock is down 13% since mid-March.

Most Popular

5 Beaten-Down Stocks to Buy on the Dip
stocks to buy

5 Beaten-Down Stocks to Buy on the Dip

The market has delivered some nauseating volatility of late. The good news? That has teed up a few great stocks to buy at a discount.
September 27, 2021
10 Best Stocks for Rising Interest Rates
stocks

10 Best Stocks for Rising Interest Rates

The 10-year Treasury yield is hovering near its highest level in months. Here are 10 of the best stocks to buy in a rising interest-rate environment.
September 30, 2021
13 States That Tax Social Security Benefits
social security

13 States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in these 13 states, your Social Security benefits are subject to a state tax. That's on…
October 4, 2021

Recommended

Yogi Berra Quotes Investors Can Live By
investing

Yogi Berra Quotes Investors Can Live By

Baseball legend Yogi Berra was wise, in his own muddled way, about more than just sports. His words hold truth in life – and in investing. Here are th…
October 13, 2021
Is Stagflation a Serious Market Risk?
investing

Is Stagflation a Serious Market Risk?

High inflation and corporate warnings of supply chain issues have brought stagflation fretting to a fever pitch.
October 12, 2021
Poll: ESG Investing Is Gaining Traction
Becoming an Investor

Poll: ESG Investing Is Gaining Traction

Investors care a lot about environmental, social and governance issues according to our new poll.
October 12, 2021
Is the Stock Market Open on Columbus Day 2021?
Markets

Is the Stock Market Open on Columbus Day 2021?

Columbus Day (increasingly known as Indigenous Peoples' Day) is a federal holiday, but it's a regular working day for most of Wall Street. Here are th…
October 10, 2021