Momentum investing works both ways. Stocks in a strong uptrend can continue to outperform the market, as is often discussed in StreetAuthority’s Maximum Profit newsletter. Yet stocks in a downtrend can watch the tide take them even further out to sea.

Indeed many stocks, which had already dropped 20% or 30% from their 52-week highs earlier in the year have seen their downward spiral accelerate in recent weeks. On several recent occasions, the number of stocks making new 52-week lows on the Nasdaq and NYSE has exceeded 200, an amount not seen in quite some time.

#-ad_banner-#Amongst the rubble, some stocks have really tumbled, falling by half, or more, from their 52-week highs. In some respects, these are “falling knife,” stocks. You don’t want to catch them while they are plunging. Yet as they keep falling and falling, these stocks often turn into deep-value plays, setting the stage for considerable rebound potential when the broader investor mood shifts. It is nearly impossible to try and time their bottom. They could always fall a bit further, but deep-value plays don’t stay that way forever.

With that in mind, I took a look at all of the stocks that have fallen at least 40% from their 52-week high. Many of them reside in the energy sector, and in light of my view that oil prices have further to fall, it’s simply premature to wade into this group just yet.

It’s also likely wise to steer clear of micro-caps right now. They are currently under pressure and tend to rebound slowly, even when the broader market shifts into a brighter mood. As a result, I only focused on companies that still hold a market value of at least $400 million.

Lastly, I narrowed the list to stocks that are trading for less than 12 times trailing earnings. There are many value metrics for investors to consider, though the price-to-earnings ratio is often a good starting point. Here’s what we came up with.

Source: ThomsonReuters

I looked into the reasons behind the sharp drop in these stocks and found two that appear to possess solid rebound potential.

Terex Corp. (NYSE: TEX)
A good time to invest in cyclical stocks is when they are on the wrong end of the economic cycle. Expectations (and valuations) are low, and as the cycle turns, the stage is often set for an improvement in sales, profits and the relevant multiples. This heavy equipment maker surely appears to be an out of cycle play these days, at least looking at its year-to-date stock chart. Terex makes equipment used in construction infrastructure and mining, such as cranes, aerial work platforms and road building products.

To be sure, business headwinds have grown in recent quarters. In mid-September, Terex cut 2014 earnings per share guidance by nearly 10%, to a range of $2.35-to-$2.50. That’s well below the $4-to-$5 a share the company earned back in 2006 and 2007, when demand for cranes and other construction equipment was at its last peak. Since mid-September, shares have weakened even further on concerns that business conditions outside the United States are worsening.

Yet the dismal stock chart — and the recent reduction in guidance — obscures the fact that the U.S. economy is now producing 200,000 jobs per month, and many companies need to start making major infrastructure investments in anticipation of future growth.

This is where the timing of a beaten-down value stock becomes tricky. Analysts’ estimates for Terex may need to come down a bit more when Q3 results are released in a few weeks. Yet shares now appear to anticipate such an outcome.

Meanwhile, Terex has begun to embark on a streamlining of its operations, which grew bloated after a series of recent acquisitions. Such moves should set the stage for EPS to return — or even exceed — the peak levels seen a decade ago when demand for the company’s heavy equipment improves.

The question is: At what point do value investors start to look past the near-term weakness and start building positions in advance of improving business conditions? That’s hard to say. A potential near-term catalyst: Terex announced a $200 million share buyback program in December 2013, and with shares back in the doghouse, the company may look to do so again when Q3 results are announced. 

Tower International, Inc. (Nasdaq: TOWR)
Tower supplies metal-stamped frames and chassis to a range of auto makers. A pair of “beat and raise” quarters helped boost this stock from $22 at the start of the year to $36 by mid-summer. Yet in the past few months, shares gave up all of those gains.

The stock’s recent rapid decline appears to be the result of a proposed bond offering that was subsequently withdrawn, due to “market conditions.” That’s another way of saying that Tower would likely have had to pay a higher yield on its newly-issued bonds than it would have liked.

Yet it’s important to understand that while Tower does have a fairly-indebted balance sheet, it has also been aggressively boosting its cash balance and, with few debt obligations coming due in the near-term, financial liquidity issues should not be a concern.

Meanwhile, the pullback in shares has led to some stark valuation metrics. Goldman Sachs forecasts earnings before interest, taxes, depreciation and amortization to rise from $226 million this year (marking the sixth straight year of improvement), to $267 million by 2016. To put that in context, the company sports a market value of less than $500 million. Goldman has a $35 price target on Tower, representing nearly 40% upside.

Risks to Consider: Both Tower and Terex have a considerable amount of international exposure, and if global conditions grow more perilous in coming weeks and months, then shares will be hard-pressed to rally.

Action to Take –> The only time you can buy high-quality companies at low multiples is when they are out of favor. That makes their appeal counter-intuitive. It’s easy to make a bearish case for such stocks when times are tough, but as value investors such as Warren Buffett suggest, the best time to own such stocks is when they are widely loathed. Both Terex and Tower may drift lower still in coming weeks, due to global economic concerns, but appear poised for significant rebounds if you have a one-to-two year time horizon.

If these two stocks mount a strong turnaround, as I suspect they might, then they could be a strong candidate for our Maximum Profit newsletter. As I mentioned above, Maximum Profit identifies stocks based off a measure of momentum known as relative strength. When a stock has a relative strength greater than 70% of the market and has strong cash flow, it is flagged, researched and if sound fundamentals are present, then the stock is purchased. This has led to gains of as much as 181% in a little more than one year. To get access to the names and ticker symbols of the latest buys, click here.