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3 Turnaround Stocks to Consider in 2018

Billy Duberstein, The Motley Fool

Warren Buffett once said, "be fearful when others are greedy and to be greedy only when others are fearful." After 2017's incredible run in the S&P 500, you may be wondering if there are any undervalued stocks left. I think there are -- in fact, I believe some stocks may be especially cheap right now due to tax-loss selling. Here are three intriguing names that have lagged the market in 2017, but could be poised for a turnaround in 2018 and beyond.

man in business suit looks through a telescope to a hazy horizon as the sun sets.

Investing in turnarounds requires faith in the long-term strategy. Image source: Getty Images.

CenturyLink

CenturyLink (NYSE: CTL) declined roughly 25% this year, as the U.S. telecom's legacy businesses -- such as landline phones and slower copper connections -- declined faster than CenturyLink's strategic services, such as high-speed fiber, could grow. Continued earnings disappointments, a high debt load, and fears of a dividend cut sent the stock to new lows earlier this Fall.

CTL Year to Date Price Returns (Daily) Chart

CTL Year to Date Price Returns (Daily) data by YCharts

However, CenturyLink just closed its integration with Level 3 Communications in late October. Level 3 will not only give CenturyLink increased international scale, a large fiber footprint, and cost synergies, but will also bring with it CEO Jeff Storey, who steered Level 3 to market-beating gains over the past four years.

The combined management team recently displayed their confidence too, as Storey, current CenturyLink CEO (soon to be Chairman) Glen Post, and nine other board members all bought significant amounts of stock between December 8-11. That certainly shows management's confidence that the new CenturyLink will be much stronger than the old.

IBM

IBM (NYSE: IBM) has also lagged the market both this year and over the last several years, as it, too, has faced declining legacy businesses while transitioning to newer products. While that transition has been painful -- the company has posted 22 straight quarters of revenue declines -- the most recent quarter showed seeds of a turnaround.

SPY Year to Date Price Returns (Daily) Chart

SPY Year to Date Price Returns (Daily) data by YCharts

In the third quarter, IBM's strategic imperatives of Cloud, Analytics, Mobile, As-a-service Software, and Security, collectively accelerated 10% and to deliver 45% of revenues. Once these growth seeds exceed 50% of the total company, then IBM should begin growing overall once again.

In addition, IBM continues to lead all companies in patents filed virtually every year and has made big bets on next-generation technologies such as blockchain, quantum computing, and artificial intelligence. At only 12.7 times earnings, you aren't paying very much to bet on a company that has survived over 100 years and lived through many technology transitions.

Lending Club

One name that has been sold off very recently is Lending Club (NYSE: LC), the leader in the relatively new industry of FinTech personal lending. The business model uses big data and technology to underwrite personal loans, which Lending Club then posts to its marketplace for investors to purchase. Investors on Lending Club's platform, encompassing banks, asset managers, and individual investors, can select a diversified pool of loans in increments as low as $25. Lending Club's Prime loans have historically yielded investors mid-single-digit returns.

Lending Club's stock sold off severely after its third-quarter earnings report, as the company's guidance fell below investors' expectations. This is because Lending Club recently tightened its credit model in September, which should improve the company's loan charge-off rates, but slow growth in the near-term. Lending Club's fee-based model depends on increasing volumes, so growth-oriented investors were likely scared off by the reduced targets.

SPY Year to Date Price Returns (Daily) Chart

SPY Year to Date Price Returns (Daily) data by YCharts

However, I think the hate has gone too far. Lending Club is the largest and only publicly traded loan marketplace, which has made it the go-to for institutional investors looking for exposure to consumer loans. By tightening credit, Lending Club has demonstrated a long-term commitment to sound underwriting, which should deepen its relationships with these important investors.

And while Lending Club did reduce its near-term guidance, it still guided for roughly 20% revenue growth and increasing profitability next year, which isn't too shabby. The market opportunity in U.S. credit card consolidation -- Lending Club's core business (though not its the only one) -- is still large, at $300-$350 billion, which means Lending Club's current $11.5 billion loans outstanding only amounts to about 3-4% of this market.  There is still plenty of room to grow, even if it doesn't happen as fast as some would like.

While the short-term results for CenturyLink, IBM, and Lending Club haven't been pretty, each company spent 2017 investing in its long-term future. While turnarounds can be difficult to time, it's easy to picture 2018 being much kinder to these companies than 2017.

More From The Motley Fool

Billy Duberstein owns shares of CenturyLink, IBM, and LendingClub. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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