Looking for Long Shots

 | Sep 18, 2012 | 4:30 PM EDT
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When the new edition of Value Line comes out each week, one of the first places I turn is to the list of the 100 stocks the service estimates have the highest three-to-five-year appreciation.  Almost all of these stocks receive very low ranks for short-term performance, financial strength and overall safety. They are long shots and turnarounds that will either soar to new heights and give investors a return of many times their investment -- or they will flame out entirely, leaving a pile of ash. This list requires careful shopping, but it has provided some of the best performing investment ideas over the course of my career.

Many of the stocks on the list can be ruled out almost right away. Green Mountain Coffee Roasters (GMCR) makes the list. If everything goes right for the company, the stock could regain some if its former glory. However, I dislike the product and think there is a high fad element to the business, so I have no interest in owning the shares. The same can be said for the handful of for profit education stocks on the list of potential high-return long shots. The industry's business model is broken so until the majority of the group trades below liquidation value, I don't want to own these stocks.

One stock that does catch my eye as a potential turnaround speculation is Tecumseh Products (TECUA). I noted back in April that the company could probably be liquidated for more than the stock price at the time. The stock plunged by more than 50 % and then recovered nicely, so that it is currently trading about 40% above its original level. About 63% of the company's revenue comes from compressors for commercial refrigeration and the balance is from compressors for residential refrigeration and consumer air-conditioners. The company is muddling along, but it needs a full-fledged global recovery before revenues and profits begin a growth trajectory once again.

A decade ago, this was a $50 stock. Before the economy headed south in 2008, the shares traded above $30. I think they will reach 2008 levels sometime in the next 10 years and be a home run for investors who are patient -- and aggressive scale buyers of the stock at or below current levels. If it takes 10 years for the stock to get back to the $32 level, investors would realize a 50% annualized return on an investment of about 20%. I think it will happen more quickly than that, and a global recovery will push profits and stock prices to the previous highs in much less than 10 years.

Right now the stock is trading at levels that seem to reflect a permanent global recession. The shares fetch just 40% of tangible book value and $.10 on the dollar of sales. Using generous markdowns of carrying value for property plant and equipment the company could be liquidated for roughly 2.5x the current capitalization. Short-term concerns and weakness in Europe and South America could push the shares lower in the next six months or so, creating additional buying opportunities for patient investors. I think investors can buy the stock at its current levels and add aggressively on additional weakness.

Energy Solutions (ES) is still on the list. I bought some shares in the nuclear services company when it missed earnings estimates and announced management changes back in June. The company has to adjust its business model and look for larger partners on some of the projects to allow them to diversify the revenue base. The company is involved in what it calls "cradle to grave" nuclear services, and any global increase in nuclear power discussions and usage could turn this company into a growth stock in the years to come. Even if we see a continued turn toward other energy sources, decommissioning and cleanup work should allow the company to grow its profits and stock price.

Using the long shot list from Value Line requires careful research and investigation, but the potential payoff is more than worth the time spent -- especially for younger, more aggressive investors.

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