Hunting Long Shots and Turnarounds

 | Jul 25, 2013 | 3:00 PM EDT  | Comments
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Stock quotes in this article:

mt

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aci

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fch

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paas

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acco

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arrs

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goog

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cvgw

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mwv

One of my favorite activities each week is to sit down with Value Line and look for opportunities I might have missed in my regular searches.

Although Value Line is a growth and momentum-oriented service, they provide a huge supply of fundamental and price data. There are endless ways to use the information. It is still my favorite research service, even if they are not as popular as they once were, or as internet-savvy as some competitors.

One of my favorite sections of the weekly issue is the statistical screens they provide. I have picked some solid ideas off these lists during my career. I am particularly fond of the list of stocks that have the greatest three-to-five year appreciation potential.

This is basically a hunting ground for long shots and turnarounds that have the potential to give you a return of multiples on your capital -- instead of the mere percentages for which most investors are searching. Applying a little analysis, fundamental credit checks and common sense, you can put together a decent portfolio of high return candidates. They won't all work. But it has been my experience that many will work and will provide a market-beating return over time.

It is always gratifying to see that stocks picked by other methods also show up on this list. Many of my stocks including Arcelor Mittal (MT), Arch Coal (ACI), FelCor Lodging (FCH) and Pan American Silver (PAAS) are on the list of potential top gainers.  If they are right, I should have a very good three-to-five years.

A returning stock on the list that is likely to end up in my kids' portfolio very soon is ACCO Brands (ACCO). The company provides office products to retailers, including basic stuff like staplers, paper clips, pencils and shredders. In the last year, they purchased the office products division of MeadeWestvaco (MWV). They took on quite a bit of debt to accomplish the transaction but have already refinanced it and decreased total interest expense.

ACCO is also expanding operations in Latin America and this should also help drive revenue and profit gains over the next several years. They will generate $150 million of cash flow this year, which can be used to pay down debt and to continue to expand the company. Value Line thinks the stock has the potential to triple over the next several years, and I see no reason it doesn't at least double to catch up to my estimate of intrinsic value.

ARRIS  Group (ARRS) is a company that should see extraordinary growth over the next five years. They make all the stuff you need to hook up to the internet and digital cable TV including routers, modems, and set top boxes. They recently purchased Motorola Mobility from Google (GOOG), and this expands their offerings in network infrastructure, content management and security.

With the explosion of video on demand and multiple screen usage by consumers and businesses alike, this company should see strong demand as customers will need their products to increase bandwidth to capitalize on VOD opportunities. The company should have long term profit growth in excess of 15% annually and that could cause the stock to double or greater over the next few years.

Calavo Growers (CVGW) is probably not going to show up in my portfolio anytime soon. Based on the Peter Lynch "buy what you know theory," my wife and daughter should own CVGW. The company makes guacamole, salsa and hummus products for the retail and restaurant trade. They are one of the largest avocado companies in the world and they also process and pack tomatoes and papayas.

Higher fruit costs have hurt margins in the past few quarters but demand for avocados is rising and will continue to do so. Traders should probably buy it before my daughter's extended visit next month, as the two of them can put away buckets of guacamole and hummus over a bottle of wine in the evening. I may help a little bit as well.

The company will see strong demand and a pickup in the economy will bring additional increased demand for restaurants and bars for their salsa and guacamole products. The research service thinks the stock can double over the next few years, and they are probably correct as earnings growth should be strong. The stock yields 2.3% and there should be solid dividend growth as well.

I always get a kick out of Wall Street research reports that rate a stock a strong buy and set a price target 10 to 20% above the current price. If I buy a business, I want to earn several times my money over a reasonable time period. Looking for turnarounds and longshots can help me accomplish this goal.

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