(MONEY Magazine) – When stock valuations head into uncharted waters, as they did in 1997, smart investors often start trawling for companies whose share prices have sunk recently because of temporary business setbacks. The strategy, known as bottom fishing, sounds simple: Buy such a firm's stock when the price is low, wait for the company to come back, and then count your profits as its share price rises. Trouble is, how do you tell if a stock is merely suffering a short-term setback?

Experts on turnaround stocks offer this advice. First, look only at companies that are No. 1 in their fields or control at least a third of their markets. "High-quality companies always seem to get back on track," says Alan Skrainka, chief investment strategist for Edward D. Jones in St. Louis. Next, make sure the stock's price/earnings ratio is about 35% below its industry's average, says CIBC Oppenheimer chief investment strategist Michael Metz in New York City. You're unlikely to lose much money on such underpriced stocks.

With the help of seven analysts, we identified four temporarily downtrodden companies. Their stocks are trading near their 52-week lows and, according to the analysts, have excellent prospects of bouncing back and returning as much as 29% over the next 12 to 24 months. As with all bottom fishes, "You may need to hold on at least two years to get that expected return," says Bear Stearns strategist Elizabeth Mackay. The stocks, which trade on the New York Stock Exchange, are listed in descending order of forecast returns.

--Union Pacific (ticker symbol: UNP; recently sold at $63.25, down 13% from the stock's 1997 high; 2.7% yield). This $10 billion railroad, based in Dallas, bought the Southern Pacific for $3.9 billion in 1996 to create the nation's largest rail network, with some 36,000 miles of track mostly west of the Mississippi. As UNP was integrating its lines with Southern Pacific's, however, a surge in demand for chemicals caused a freight traffic logjam. So the railroad reduced the number of railcars by 7% to 330,000. As a result, UNP may suffer a loss in 1997's last quarter. Even so, Deutsche Morgan Grenfell analyst Terry Gardner believes the railroad will return its freight service to normal levels by spring, which will restore earnings growth to 15% a year. And because of efficiencies from the merger, Gardner believes UNP will be on track to 20% or more annual earnings growth in 1999. His target for the stock is $80 within 12 to 18 months for a 20% to 29% annualized total return.

--American Standard (ASD; $39.75, down 23%; no dividend). Last September, analysts lowered their third-quarter earnings estimates by 18% for this $6 billion maker of air-conditioning, automotive and plumbing products, for two reasons: the cool summer and the strong U.S. dollar, which led to a 1% decline in earnings even though revenues were up 2% over those of a year earlier. Now the Piscataway, N.J. firm is planning to move expensive factories from Western to Eastern Europe. A hotter summer is expected this year too. Therefore, Goldman Sachs analyst Stephen Dobi pegs earnings to increase 18% over the next 12 months, boosting the stock 26% to $50.

--Praxair (PX; $46, down 21%; 1%). For the 12 months that ended last September, currency crises in Asia and Brazil cut earnings 5% at this $4.8 billion Danbury, Conn. producer of argon, carbon dioxide and other industrial gases. Morgan Stanley analyst Leslie Ravitz believes today's depressed share price fully reflects investors' uncertainty about emerging markets. Moreover, William Blair analyst Robert Bartels predicts that by mid-1998 Praxair will finish "integrating and digesting" its $58 million acquisition of Gas Tech, a supplier of welding products and gases. Ravitz projects that PX's earnings will rise 11% in 12 months, lifting the stock to $55 for a 21% return.

--Pall (PLL; $22, down 17%; 2.5%). This $995 million East Hills, N.Y. company is the world's leading supplier of fluid filtration and separation products. But last year competitors undercut Pall's prices on its pioneering blood filters, which represent about 30% of total sales. Still, Dillon Read analyst Andrew Greenberg expects Pall's blood-filter sales to fuel growth in 1998. Reason: While blood filtered to remove white blood cells, which can cause medical complications, is now used in only 15% to 20% of the world's transfusions, several governments are ordering that only filtered blood be used within their borders. Greenberg sees Pall's earnings rising 15% in 1998, pushing the stock to $28 in 24 months for a 16% annual total return.

--Jeanhee Kim