Are things turning around?

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By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) -- A top-performing letter refuses to big-think about the stock market. But, hey, it's sounding optimistic, anyway.

The Turnaround Letter, edited by George Putnam, focuses single-mindedly on stocks that it thinks are undervalued on a fundamental basis. (Indeed, Putnam maintains a comprehensive database on public companies that currently are in, or are emerging from, bankruptcy, making it a good reference source on such companies.)

The Turnaround Letter deliberately eschews investment timing advice -- with the result that the Hulbert Financial Digest simply counts his stock recommendations as fully invested at all times.

This irritates me. Putnam obviously does have macro opinions and it seems to me he could enhance his performance by adjusting his portfolios to the Hulbert Revolution, which I've been writing about for nearly 30 (!) years, dammit.

On the other hand, regardless of my advice, Putnam is doing just fine right now.

Over the past 12 months, the letter is up a startling 133% by Hulbert Financial Digest count, versus 55.65% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Over the past three years, i.e. absorbing the Crash of 2008, which was a heavy blow, the letter is indeed down an annualized negative 7.32%, versus negative 5.4% annualized for the total return Wilshire 5000.

Well, maybe that's what you get for being fully invested at all times -- particularly in the wild and wooly areas that Turnaround's technique draws it into ( See Nov. 2, 2009 column).

But over the longer term, Turnaround's technique seems to prevail. Over the past ten years, the letter was up an annualized 10.29%, versus negative 0.08% annualized for the total return Wilshire 5000. (It's been a dark decade).

And since Turnaround was first picked up by HFD, at the end of 1987, it has achieved an 11.7% annualized gain, versus 9.5% for the Wilshire. That adds up.

My reason for saying Turnaround thinks things are (ahem) turning around: Its March letter writes of the housing sector:

"While it is very difficult to call a bottom in any sector -- and this one is particularly difficult to judge today -- we now think that the homebuilders are beginning to look quite attractive. They have bounced off their lows, but should have a long rise ahead of them once the residential real estate market recovers. Some more patience may still be required, but our best guess is that if we haven't already seen the bottom in the sector, we are at least close to it."

Turnaround recommends ten housing stocks for "a variety of risk appetites."

Two selected (more or less) at random:

Meritage Homes Corp.'s /quotes/comstock/13*!mth/quotes/nls/mth (MTH 17.58, +0.41, +2.39%) "roots are in Arizona and Texas, with the latter accounting for about 64% of sales. The Lone Star State has been more stable than many other markets."

Toll Brothers Inc. /quotes/comstock/13*!tol/quotes/nls/tol (TOL 17.36, +0.28, +1.64%) "caters to the upscale buyers of luxury homes, a market hit as hard as any. But the company has managed the balance sheet well...Interestingly, many of the firm's smaller competitors haven't survived the downturn, and so Toll should profit when the luxury market returns."

That's optimistic, isn't it?

On the other hand, Turnaround is not a compulsive bottom fisher. Its March issue led with a careful review of companies that had similar product problems to those currently being endured by Toyota Motor Corp. /quotes/comstock/13*!tm/quotes/nls/tm (TM 70.23, +0.26, +0.37%) (JP:7203 3,050, -20.00, -0.65%) .

Many of these companies rebounded. But Turnaround concludes:

"We would not recommend jumping into Toyota stock at current levels. We would watch the company's results for at least a couple of quarters and see if the stock falls further still before considering an investment. If you want to try to profit from the Toyota situation, we'd suggest buying the stock of Ford Motor Co. /quotes/comstock/13*!f/quotes/nls/f (F 12.77, -0.20, -1.54%) , which could benefit from Toyota's woes."