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5 top turnaround stocks of 2013

The thrill of riding a battered pick to the top.

  • By Jeff Reeves,
  • MarketWatch
  • – 09/30/2013
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Americans love a good underdog, and comeback stories always captivate us.

Take Oracle Corp. (ORCL) CEO Larry Ellison and his America's Cup team that rallied to win an amazing eight consecutive races and take the coveted sailing trophy.

Investors love a good turnaround story, too, but for different reasons – the insane profit potential.

When you find a battered pick at the bottom and ride it back to even a modest level of success, it's not uncommon to see your investment double or triple. It's a risky game, obviously, because turnaround stories are uncommon and some stocks at the bottom can languish there for years.

But if you like a good comeback story, here are five turnaround stocks that have posted huge gains in 2013 as their fortunes have changed.

eTrade

Sector: Financial services
Year to date: 88%

If you want to know when the stock market got ugly, just look at a chart of eTrade (ETFC).

About halfway through 2007, as the market neared its apex and the broader economy started to show signs of distress in preface to the financial crisis, eTrade fell off a cliff as capital markets began to slow and ultimately stall out altogether.

It didn't help that the company also had branched out from mainly an online stock broker into more consumer lending that included mortgages and home equity loans.

But while eTrade remains significantly below those levels and endured some brutal losses in the intervening years, the stock has nearly doubled in 2013 as the company's long slog back to profitability has finally paid off.

Admittedly, the top line is pretty stagnant and trading activity is still pretty weak, thanks both to lingering uncertainty and the low-cost, index fund revolution. And eTrade may never return to its pre-crisis levels. But fiscal 2014 will usher in the first year since 2007 where the company turns a profit every quarter.

Delta Airlines Inc

Sector: Airlines
Year to Date: 102%

Airline stocks are tough investments. The industry is characterized by regular bankruptcies, expensive pension costs, high regulation that limits the agility of airlines and broader economic headwinds that have kept consumers and business travelers a bit more grounded than in years past.

However, one airline's pain is another airline's opportunity, and as American Airlines grapples with bankruptcy and the hopes of a merger with US Airways (LCC) it has allowed Delta (DAL) an opportunity to show its stuff as the second-largest U.S. airline by total traffic.

And after a troubled period where it emerged from bankruptcy in 2007, just in time for the economic downturn, Delta has adapted and is finally getting back into the groove.

It is one of the better run airlines (at least from a balance sheet perspective — no gripes about customer service, please) and in fiscal 2013 could see four times the profits it saw in 2010 should projections hold.

Heck, Delta even announced an ambitious dividend and buyback scheme worth over $1 billion — something unheard of in an industry characterized by regular bankruptcies and debt restructurings.

Micron Technology Inc.

Sector: Semiconductors
Year to Date: 175%

Semiconductor manufacturer Micron Technology (MU) makes a host of high-tech products found in computers and mobile devices — mostly in the flash memory space. And as tech investors should know, the biggest cash cow for semiconductor companies has long been the PC business — and a decline in laptop and desktop sales has worked against Micron.

So in 2008 and 2009, Micron underwent a major restructuring and laid off about 15% of its workforce in an effort to reverse its fortunes.

Then in 2010, Micron bought flash-memory company Numonyx for about $1.2 billion, giving it a huge leg-up in market share and allowing for economies of scale. Over the next few years, MU teamed up with Intel (INTC) on a number of flash memory projects to benefit both of the embattled chipmakers at a time when they needed to work together.

These moves and others seem to have paid off, with Micron stabilizing its top line and projecting a return to profitability in the next fiscal year.

The fact that these changes happened even through the tragic 2012 death of CEO Steve Appleton in a plane crash is even more admirable for the once-troubled tech company.

Best Buy

Sector: Specialty retail
Year to date: 225%

Best Buy (BBY) doesn't stand out to many investors or consumers as a company with a bright future. But while the embattled big-box store certainly has its hands full amid e-commerce competition, it has managed to adapt and figure out how to survive — and even thrive — in this environment.

Though sales have mostly flatlined since 2010, Best Buy has managed to stage a pretty substantial turnaround by slashing costs to offset shrinking profit margins. In fact, Best Buy may close out this fiscal year with its first annual profit since 2011, and is forecast to then grow earnings a modest 8% again next year.

And amid better profit margins and operations in brick-and-mortar stores, don't forget that Best Buy is taking the fight to Amazon.com Inc. (AMZN) on the Internet, too. The company saw double-digit year-over-year growth for online sales in the second quarter as part of a continued push to get people buying both in stores and on the web.

It's undeniable that part of the pop in share price is thanks to founder Richard Schulze making noise about taking the company private, and a short squeeze that allowed the stock to double in a few months to start the year.

Netflix

Sector: Consumer services
Year to date: 238%

Netflix (NFLX) was nearly left for dead in late 2011 after the Qwikster PR debacle that irritated customers with both the gall of Netflix splitting its DVD and streaming businesses without asking, and the threat of price increases driving away customers.

But the company muddled through, and not just held on to market share amid tough competition from other streaming video providers like Hulu, but grew the business at home and abroad.

Netflix made an ambitious investment in original programming and international growth, and while some bulls expected validation eventually it shocked even them to see 2013 open with a surprise profit — and then an amazing 14 Emmy nominations for its original programming offerings.

And the story is still rolling at Netflix, with "House of Cards" actually bringing home three Emmy awards for Netflix, and international growth continuing at a brisk pace.

Of course, whether the gains can be sustained is anybody's guess. Competition is heating up from Amazon.com with its Prime Instant Video and others will continue and the streaming video space is still very young.

But those who put their hopes in Netflix two years ago have been richly rewarded for their investment.

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Copyright © 2013 Dow Jones & Company, Inc. All Rights Reserved.
Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.
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