Turnaround Stories for 2013

 | Dec 26, 2012 | 11:00 AM EST
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A year goes by so fast. I can remember sitting down in front of my computer around this same time in 2011 and writing about the stocks to keep an eye out for in 2012. So I'll do the same thing again this year. Here are some stocks that I feel have great turnaround potential for 2013 and beyond. Consider this column a light read for the holidays that is intended to add a few names to your shopping list for next year. Over course of the next few weeks and months, I will likely revisit each name with greater color. Note that these names are not presented in any particular order of conviction or return potential.

Restaurant chain Wendy's (WEN) appears to finally be putting all the pieces together for a nice story in 2013. Over the past five years, shares in rival McDonald's (MCD) have appreciated by over 50% while the S&P 500 return was basically flat. Wendy's shares, on the other hand, declined by more than 40% during that same time frame. A new marketing program that includes a store reimaging component along with encouraging revenue numbers make Wendy's a great turnaround story for 2013.

Dell (DELL) shares have also been a huge disappointment for the past five years – they are down around 60% vs. a 10% plus rise in the Nasdaq. Yet during those past five years, Dell has continued to generate prodigious amounts of cash flow in the face of a complete repositioning of its business from a focus on hardware sales (PCs) to a focus on software (IT solutions). Back in 2007, the shares were trading in the mid $20s. Today they trade for $10 along with a $0.32 annual dividend. Speaking of the shares, the count has declined from approximately 2.1 billion in 2007 to approximately 1.7 billion today.

Auto parts retailer Advance Auto Parts (AAP) is a high quality business that was treated like the baby who was thrown out with the bath water in 2012. While growing new car sales have a negative effect on demand for auto parts, shares in both AutoZone (AZO) and O'Reilly (ORLY) are up nearly 10% in 2012. AAP shares, however, are down about 3% in 2012. Several months ago, there was a rumor that a private equity buyer was thinking about buying AAP for as much as $90 a share. The shares rallied and then fell back to $70, today's current price. Personally, I'm glad no buyout was announced. Looking through a multi-year window, AAP shares are easily worth north of $100. O'Reilly and AutoZone are currently trading for 170% and 150% of sales, respectively. AAP shares are trading for 80% of sales. At 150% of sales, shares would be trading north of $130. Time is a friend of the value seeking investor and a foe to the speculator.

Ideally, the price-to-value disconnect present in the above three businesses will lead to a reappraisal of the share price in 2013. Realistically, it could take a little longer to truly appreciate the return on investment potential. But the math cuts both ways: Whether a stock advances 20% a year for three years or simply by 75% in year three, you're still getting a 20% annualized return. And before you know it, I'll be writing about the best stocks for 2015. Happy holidays and New Year to all RM readers and fellow contributors! Here's to a prosperous and interesting market in 2013.

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