Are Untimely Stocks Becoming Timely?

There's no denying the appeal of out-of-favor stocks. In the short run, stock prices are influenced by Wall Street voting behavior. So if a business is out of favor, investors cast their votes by selling. That behavior can create opportunity for opportunistic investors. Of course, when playing in field-of-investment options, there is also a risk of getting burned from a stock that has permanently fallen out of favor. Here are some names that appear to be untimely now but could see a reverse of fortune in the very near future.

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A Diamond In The Rough

One of the best oil rig contractors in the industry today, Diamond Offshore (NYSE: DO), trades at under 8 times earnings. Drilling moratorium or not, the need for these drilling rigs should remain strong going forward. With operating margins of nearly 50% and a net income margin over 30%, shares look incredibly attractive going forward. Even if utilization rates and day rates don't improve in the near future, Diamond has ample liquidity to last until the next up cycle.

It also doesn't hurt that conglomerate Loews (NYSE: L) is majority owner of Diamond. Many investors were put off when Diamond voluntarily reduced its distribution, which sent the yield down from over 6% to under 1% today. Should management decide to increase distributions in the near future, shares should see some strong interest.

You Just Have To Be Patient

Many investors have lost confidence in retailer Sears Holdings (Nasdaq: SHLD) and for good reason. Investors have been waiting, forever it seems, for investor extraordinaire Eddie Lampert to turn the company around. Many have called Lampert the next great investor after Warren Buffett, and many more are trying to paint Sears as the next Berkshire Hathaway (NYSE: BRK-B) (NYSE: BRK-A). Buffett, after all, took a textile mill and turned it into the current Berkshire Hathaway. Yet at this time, Lampert seems bent on improving the retail operations at Sears. If anyone can do it, it's him, but he's facing a lot of headwinds. Retailing is an incredibly tough business - low margins, low barriers to entry and inventory risk are just some of the structural disadvantages in the industry. But Lampert continues to buy back shares at a rapid clip, and insiders now own over 60% of the company. So at least you have management with a much bigger financial stake at risk.

The 80/20 Rule

It is often believed that 80% of stock price returns occur during 20% of the time period. That's illustrative of why market timing is a fool's game, and buying out-of-favor stocks of quality businesses with great management and exercising patience wins. (For more, see 3 Stocks Getting Upgrades Before Earnings Season.)

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