EXCLUSIVE: Find Deep Value in Turnaround Stocks with Kathy Kristof

Turnaround stocks give some of the largest returns in the market, but investors need be sure they aren't catching a falling knife.

In an exclusive interview, Kathy Kristof gave advice for the average investor to find these turnarounds. Regarded as an expert in this space, Kristof recently published a piece in Kiplinger giving some of her favorite comebacks.

Kathy Kristof started by informing investors that these assets are especially risky and before entering a position should determine their risk tolerance. “One of the things people do is they think their very risk tolerant until they have a loss, and all of a sudden they aren't risk tolerant at all.”

After finding companies that have lost a lot of share value, “you have to be really familiar with the story and understand not only what made them fall, but what could turn this around.”

“You are almost always looking for new management, that's a given. One of the other things you should be looking at is, what was the fundamental problem?”

Using JC Penney JCP as an example, Kristof explained “one of the reasons it hasn't worked out I think is because turning a retailer around is a lot more complicated than finding a new manager, especially in a market that is a wash in off price retailers.”

On the opposite side of the spectrum is Rite Aid RAD, whose competition is more limited and they are one of the biggest chains in the country. After running into debt issues, the company seems to be paying it down and may be on track for a recovery.

“Again, you really have to dig into their story, you have to figure out what put them into trouble in the first place, and then walk through the reasonable scenario of how you think they are going to get out of it now and where they are on that trajectory. So pick your stocks carefully and diversify!”