Who gets your vote for most momentous fallen angel?

No, not the fallen angel whose image scared the heck out of many of us in Sunday school. I’m referring to so-called “fallen angel” stocks — that is, companies once favored as Wall Street darlings but whose shares subsequently fell, then rebounded sharply.

These special-opportunity value plays can offer remarkable market-smashing returns.

One of my favorites in this category is Starbucks (NYSE: SBUX). By the time Starbucks dropped into the single digits in late November 2008 from a high of just under $40 a share two years earlier, analysts had all but left the coffee giant for dead.

As the shares fell, Wall Street failed to keep in mind the ubiquitous chain’s intense customer loyalty. With this powerful tailwind, the positive impact of a few strategic tweaks to the business model put these shares back on a strong uptrend in early 2009. Starbucks climbed more than seven-fold during the next three and a half years to reach a high of $62 in April 2012.

Diagram of a fallen angel that rose again.

The fallen angel became a resurrected angel, handsomely rewarding the early believers. A $5,000 investment in Starbucks any time between Thanksgiving 2008 and mid-March 2009 would be worth more than $25,000 at today’s price.

It may be too soon to tell whether Nuance Communications (Nasdaq: NUAN) is a fallen angel in the making, but some of the similarities with Starbucks are compelling — including a recent drop in share price that got the attention of Game-Changing Stocks’ Andy Obermueller.#-ad_banner-#

Just as Starbucks was, and is, the dominant player in retail coffee, Nuance rules the roost in its niche — the developing speech-recognition software sector.

The know-it-all virtual assistant in your iPhone understands your requests thanks to speech-recognition software that was probably engineered by Nuance. [I say “probably” because the terms of the relationship between Nuance and Apple (Nasdaq: AAPL) are, like many things with the computer giant, shrouded in secrecy.]

But this much can be confirmed: If you just had your appendix removed, then chances are the doctor dictated his notes on the procedure to a device using special medical speech-recognition by Nuance. In fact, health-care transcription services constitute the biggest piece of Nuance’s revenue pie.

And when you called the bank to check on your savings account balance, the account number you dictated was likely processed by Nuance technology.

You get the idea.

With annual sales in excess of $2 billion, Nuance is the leading provider of speech-recognition software.

Moreover, Nuance’s offerings are universally considered to be the best and most comprehensive on the market — and it’s plying its trade in a sector that’s expanding with voice interfaces in a growing number of products and services, even including automobiles.

Despite its continued dominance, Nuance is trading nearly 37% below a high of $29.96 a share established a little more than a year ago. The lion’s share of that drop occurred in a single trading session one month ago, after the Burlington, Mass.-based company missed earnings estimates and trimmed its full-year sales and earnings forecasts.

Given its market dominance and solid fundamentals, Andy believes Nuance’s share price could return to previous highs in relatively short order.

On Feb. 7, Nuance cut its fiscal 2013 revenue forecast of $2.15 billion to $2.2 billion, down from a projection of $2.17 billion to $2.22 billion in November. The company also lowered its adjusted earnings outlook to $1.76 to $1.87 a share, from $1.84 to $1.94. Among the culprits, according to Bloomberg: a dip in transcription volume among health-care customers as they transition to electronic medical records and the company’s new Dragon Medical speech-to-text software, plus the sluggish economy in Europe.

Many observers believe Nuance was unduly punished by Wall Street for a change in guidance that wasn’t exactly devastating. One of them is Andy, who featured Nuance in his most recent issue of Game-Changing Stocks.

Has the recent price action set up a potential buying opportunity? I know Andy would say that it has…

Bob: What’s the scope and future of speech-recognition software?

Andy: Well, before we talk about the future, let’s talk about the now. The two most important technologies, tablets and smartphones, do not have traditional keyboards. So, as for the future, the way we interface with technology is evolving. In the coming years, the mouse will disappear. And the Qwerty keyboard (so-called because of the arrangement of the first six keys on the top-left letter row) will go with it. We will swipe and we will speak. This will be true for all devices, from computers to the pay station at the car wash. You won’t reach over to fiddle with the radio in the car, you’ll tell the car to adjust the volume. You won’t need a remote for your TV, you’ll tell it to change the channel — or search for whatever you want to watch. You’ll tell your alarm clock that you are awake, and tell the coffee pot to start brewing. Left the house and meant to turn on the dishwasher? You’ll tell Siri — or whatever personal assistant is integrated into your phone — and it will send the dishwasher a message to get started. The scope is absolutely huge. We have not even scratched the surface of what’s to come in this space.

Bob: What is it that you like about Nuance in particular?

Andy: It is the dominant player, and that’s the key. When you have its kind of strong relationships with manufacturers to provide such vital technology for their products, that gives a company what Warren Buffett calls a very wide moat around the business. It’s the go-to provider for the leading manufacturers’ best products.

There is no substitute for a leading industry position. This is a company, after all, with thousands of patents and thousands of pending patents. Can you imagine the resources that would take to overcome? Frankly, I don’t think it would be financially viable to even try. I’d hire this company before I would try to replicate its results. And the world’s best companies have come to the same conclusion.

Another thing I like is that the results are strong. The company is still handily profitable. Wall Street totally overreacted to the latest earnings guidance, which was only nominally lower, not even in the same neighborhood as “significant.” Nothing fundamental about the business’s position, ability or viability was called into question, and yet the shares were pretty hard hit. I like that I can buy this company’s bright future at a greatly reduced price and take advantage of its continued rise as this technology gains more and more traction.

Bob: At what price do you recommend buying the stock?

Andy: Any price below $20 strikes me as a screaming deal. Even if it only rises to its previous levels, which I expect it to recapture in the near-term, it will likely outrun the market from here.

Bob: What are the risks?

Andy: Nuance does compete with some major players, namely the likes of Google (Nasdaq: GOOG) and International Business Machines (NYSE: IBM) and Microsoft (Nasdaq: MSFT), each of which has very smart people doing very good work. Each of these companies also has its own various solutions in the speech recognition space, so while Nuance is dominant, it does face competition from companies that are also go-to suppliers of various technologies. Investors need to keep that in mind.

Bob: You’ve had a chance to test-drive one of Nuance’s products. What did you find?

Andy: I bought the consumer version of the software to use on my Apple MacBook Air. I get a ton of email, and I try to respond to all of it. Well, when your week requires you to send 100 or so page-long emails, then you start looking for a better way. Nuance’s Dragon software installs itself into a button along the menu bar, where the computer lists “File” and “Edit” and all those choices. You then click on it and a window appears. You simply speak and your words appear, and you can send the text wherever you want, into an email, a Microsoft Word document, whatever.

When you set the software up, it takes a few minutes to “train” it to recognize your voice. Then you’re off to the races. I was amazed at how accurate it was — and how fast I could talk. I can type 70 words a minute, but I can speak a lot faster. I even used the program to dictate my last issue of Game-Changing Stocks, with surprising success. So what I found was a Godsend. For $50, I basically hired a full-time assistant for less than dinner out. I predict Nuance’s Dragon will be standard on a wide variety of devices very soon. It is just too useful. It’s just too good.

Feb. 27 issue of Game-Changing Stocks.