Turnaround stocks can be very rewarding for investors, but at the same time they come with considerable risk. The problem lies in the fact that successful turnarounds are rare and reasonably difficult to identify easily in advance. In this edition of Being BAEP we consider some of the things to look out for in analysing a potential turnaround situation. In our efforts to earn above-market returns from equities, we are forever on the look-out for opportunities that we believe are underappreciated by the market. One type of stock that is often underappreciated is the turnaround stock. A turnaround can be defined in various ways, but in essence it involves a change from a poor quality company to a good one. Here we are not necessarily talking of companies whose improvement relies on the cycle, such as a building materials stock benefiting from a housing construction boom. Instead, we are talking of corporate change that is more structural and enduring.