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With earnings season in full swing again, it's that time of the year when investors find out one thing: who's been kicking you know what, who's been treading water, or who's slowly drowning in today's economic environment. Even better, this is a great time, in my view, to get into turnaround stocks that could see their price move substantially higher after they release their latest earnings numbers.

Still, time is money and creating a short review list of high-quality turnaround stocks with the potential to explode higher on strong earnings can easily become extremely time-consuming. That's why today I've found four interesting turnaround stocks that look ready to move much higher when they report their earnings this week for value-hungry investors. This should help hungry value investors get an early start on their own independent due diligence before 2014 arrives.

Now what makes these stocks good turnaround candidates? First, their valuation is enticing from a price-multiple perspective. Specifically, all these companies are trading with a low (X<15) Forward Price/Earning Ratio. Now this matters, in my view, because this valuation metric holds extra value during earnings season.

Why? Simply put, a good deal of earnings season, in my opinion, revolves around market expectations relative to individual companies. The Forward P/E ratio itself illustrates how much the market currently values a company's future earnings potential moving forward.

A company with a low Forward P/E valuation right before earnings season to me immediately indicates a few important points:

  1. Market expectations for the company's future earnings potential are low. This means that the threshold a company has to surpass in order to impress the market is low as well, which implies that if a company does exceed expectations the stock has a good probability of rallying moving forward.
  2. A company that has a low Forward P/E valuation right before it reports earnings is an interesting opportunity for an investor because they don't have to wait very long to find out how it performed. As well, another advantage here is that it reduces both systemic and non-systemic risk because holding period between when an investor buys the stock and when the company reports earnings is relatively small.

Still, just because a company has a low Forward P/E valuation doesn't inherently imply it's a great deal. That's why I cross-referenced stocks with low Forward P/E valuations against their 12-month Return on Assets (ROA) ratio.

I specifically chose to cross reference against a company's ROA ratio because the ratio illustrates three key points in my view:

  1. This ratio shows how well the company is able to generate profits relative to its current asset base.
  2. This a good proxy in terms of evaluating company management team by seeing how well they are utilizing the company's current asset base to generate a profit for investors.
  3. By using a 12-month trailing period it allows investors to get a better picture of a company's recent overall ROA performance, which also dilutes any potential strong outlier quarters.

In my opinion, a company that has a strong 12-month trailing ROA but it trades with a low forward earnings price-multiple looks like a turnaround candidate that has a good shot at beating earnings expectations.

As well, all the companies being reviewed also have a Quick Ratio (AKA: Acid Test Ratio) of 1.0 or greater. This helps ensure that the turnaround stocks that I identified don't appear to have any liquidity issues or red flags at face value.

Finally, to help finalize the list of potential turnaround stocks I reviewed the stocks' Relative Volume ratio. This is a ratio between current volume, intraday adjusted, and the 3-month average volume of a stock.

What does this exactly do or imply? It helps identify stocks that are currently experiencing unusual trading volume right before earnings.

Unusual trading right before earnings can indicate that investors are positioning for better-than-expected or worse-than expected earnings. If earnings are better than expected this should drive the stock price higher moving forward due to improved earnings or lower if the opposite scenario occurs.

Below I have identified four stocks that I consider to be good turnaround candidates due to their low Forward P/E valuations, strong profitability relative to their ROA, and that are experiencing unusual trading volume right before they report earnings this week.

The list of stocks is ranked from highest to lowest by market cap.:

1. Coach (COH)

Coach designs and sells bags, accessories, business cases, footwear, wearables, jewelry, and more all over the world. The stock has a current market cap. of $15.17B, trades with a Forward P/E valuation of 12.72.

As well, it operates with a 12-month trailing ROA of 31.30 and currently holds a Quick Ratio of 2.1 on its Balance Sheet.

The stock has recently experienced unusual trading with a relative volume ratio of 2.26 and will report earnings this week on October 22, 2013.

Downgrade Note:

In October 2013, Cannacord Genuity downgraded the stock from a BUY to HOLD with a price target of $65 to $62.

2. Apollo Group (APOL)

Apollo Group, Inc., through its subsidiaries, provides online and on-campus educational programs and services at the undergraduate, masters, and doctoral levels. The stock has a current market cap. of $2.38B, trades with a Forward P/E valuation of 11.98.

As well, it operates with a 12-month trailing ROA of 12.10% and currently holds a Quick Ratio of 1.6 on its Balance Sheet.

The stock has recently experienced unusual trading with a relative volume ratio of 2.12 and will report earnings this week on October 22, 2013.

3. Deckers Outdoor Corp. (DECK)

Deckers Outdoor Corporation engages in the design, building, and sale of footwear and accessories for outdoor activities for men, women, and children. The stock has a current market cap. of $2.05B, trades with a Forward P/E valuation of 13.4.

As well, it operates with a 12-month trailing ROA of 10.60% and currently holds a Quick Ratio of 1.0 on its Balance Sheet.

The stock has recently experienced unusual trading with a relative volume ratio of 3.29 and will report earnings this week on October 24, 2013.

Upgrade Note:

In October 2013, Janny reiterated a BUY rating on this stock with an increased price target of $75/share while Cannacord Genuity upgraded as well from a Hold to Buy with a price target of $80/share.

4. Boise Cascade Company (BCC)

Boise Cascade manufactures wood products and distributes building materials in the United States and Canada. The stock has a current market cap. of $1.08B, trades with a Forward P/E valuation of 13.05.

As well, it operates with a 12-month trailing ROA of 10.90% and currently holds a Quick Ratio of 1.7 on its Balance Sheet.

The stock has recently experienced unusual trading with a relative volume ratio of 3.1 and will report earnings today.

I hope this short list of stocks helps as investors do their own independent due diligence as they seek out new investment opportunities as 2014 approaches.

Source: 4 Undervalued, Turnaround Stocks Experiencing Unusual Trading Activity Right Before Earnings