On Sept. 24, I invested in one of the world’s leading automakers.#-ad_banner-#

I liked that its valuation was cheap, that the stock had been keeping up with the market while offering about 30% less volatility, and that future growth prospects looked well above average. At about 2%, the dividend yield was a nice bonus.

Of course, there are no guarantees with any stock, but I had hoped shares would at least continue pacing the market after I bought them. Well, if you invested when I did, you know that hasn’t been the case. Since then, the stock has been disappointing, dropping about 7% versus about a 7% gain for the market. 

I’m not worried, though, because the stock’s problems are related to an ongoing concern management is perfectly capable of resolving. Once it does, I expect the stock’s bullish run — shares are up 31% this year and more than 17% a year for the past three years — to resume.

I’m talking about Toyota (NYSE: TM), and the company’s main issue now is recalls.

You probably know recalls have plagued Toyota for some time now. One of the most publicized episodes occurred between 2009 and 2010, when more than 14 million vehicles were recalled after reports of sudden, unexplained acceleration in several Toyota models. Toyota agreed in December 2012 to settle the suit for $1.1 billion.

	Flickr/Moto@Club4AG
	The Corolla is the best-selling car of all time, with more than 40 million sold since its introduction in 1968. And sales remain strong, topping 279,000 units this year through November, good for a 5% year-over-year increase.

There have been several smaller, less serious recalls during the past few years. In October of last year, for instance, Toyota recalled 7.5 million vehicles for faulty (and potentially hazardous) window switches, and in October of this year, the company recalled 885,000 Camrys, Avalons, and Venzas to fix faulty air conditioning condensers.

But as I said, none of this worries me. In fact, I see all this as an excellent buying opportunity because Toyota is still a great company — and it’s taking the necessary steps to rein in its recall problem.

In 2010, the company formed a committee of chief quality officers to communicate with top management about consumer complaints and potential problems with vehicles. Importantly, the chief quality officers have been given more authority to address complaints on the spot. Previously, problems usually had to be funneled to higher-ups and dealt with by consensus.

In another key safety initiative, Toyota has begun to institute what it calls a devil’s advocate approach to design. This approach allows engineers four extra weeks to tear down and evaluate new vehicles, testing and abusing them in ways the typical driver would never consider. Furthermore, the size of inspection teams has been increased to better weed out vehicle-related safety issues during and after production.

Now, I’m certainly not saying Toyota has managed to pull a complete turnaround and that there’ll be no more recalls. That would be impossible. Every car company has recalls, and I expect more from Toyota — just substantially fewer. And as that burden decreases, the company should be able to achieve just what you’d hope for from the world’s largest automaker — that is, excellent long-term growth.

Remember, the Corolla is the best-selling car of all time, with more than 40 million sold since its introduction in 1968. And sales remain strong, topping 279,000 units this year through November, good for a 5% year-over-year increase. In addition, the Camry has been this year’s top-selling car, at 378,000 units sold through November, a 1.3% year-over-year increase.

Toyota is also seeing strong results from other models such as the Avalon, RAV4, Prius and Tundra and from other non-Toyota brands, particularly Lexus. To help fuel future sales, the company is marketing heavily to the millennial generation, especially the Corolla, which has traditionally appealed to younger people.

Long-term growth forecasts for Toyota are impressive and, in my view, achievable, assuming the company curbs its recall problem substantially. Consensus projections are for earnings per share (EPS) to climb by nearly 16% annually for the next five years, from a current $11.34 a share to $23.72 in 2018. If that occurs and the price-to-earnings (P/E) ratio remains at its current level of 11, TM could more than double from about $120 a share to more than $260.

Risks to Consider: The series of recalls has damaged Toyota’s reputation, and it’s possible the company may fail to regain consumers’ trust. 

Action to Take –> Don’t be afraid to invest in Toyota because of the rash of recalls. Although more frequent and severe than usual, they should be seen as short-term obstacles that management is addressing. Because it’s impossible to know exactly when TM will regain top form, I think now is an excellent time to buy. The stock hasn’t been this cheap for a few months, and based on company initiatives to reduce recalls and grow profits, I don’t think it will go much lower.

P.S. Before its recall troubles, Toyota was one of the most dominant automakers around. We recently identified more of the world’s most dominant companies in a recent report, “The Top 10 Stocks For 2014.” These 10 stocks have delivered a market-crushing total return of 237% over the past five years, including individual gains of as much as 925%. To get more information — including names and ticker symbols — click here.