By George Putnam, The Turnaround Letter

Turnaround stocks represent an inefficient niche. Small-cap stocks can also be less efficient. Thus, it stands to reason that small-cap turnaround stocks should be particularly inefficiently priced.

That makes the stocks below particularly interesting. They are culled from the worst performers in the S&P Small Cap 600 last year. They all have solid businesses, decent balance sheets and good rebound potential.

Electro Scientific Industries (ESIO) supplies laser-based solutions that enable precise manufacturing and testing. Management is using the company's strong intellectual property to build out the product line.

The balance sheet isn't an impediment, as cash and short-term investments totaled $172 million at the end of Q2 (March fiscal year). General economic weakness may crimp near-term gains, but the company has ample growth opportunities as it transitions to a broad-based laser micro-fabrication company.

NutriSystem (NTRI) is the number one home delivery weight loss company. A string of quarters with declining revenues and profitability reflect, in part, the sluggish economy coming out of the last recession. The weak results led the board of directors to bring in a new CEO in November.

The company is also introducing some new products and pricing strategies. We can't vouch for the sustainability of the dividend, but it certainly looks mouth watering at the moment.

Quality Systems (QSII) provides health care information systems used in automating medical and dental records. Having been around since 1974, the company is one of the more experienced providers in the sector.

Questions about revenue timing, competitive threats and the loss of an important contract caused the stock to swoon in July, but it has since stabilized.

Increasing federal and state regulation of medical records, as well as the ongoing push for efficiencies in health care, create good long-term prospects for this business. No debt, ample cash, free cash flow, and an attractive dividend make Quality Systems particularly interesting.

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