Looking for Long Shots

 | Oct 02, 2013 | 4:00 PM EDT  | Comments
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Stock quotes in this article:

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amkr

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btu

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No matter how cautious I may be about the market, I continue my daily mission of kicking over rocks. Sometimes I find stocks to put on my watch list, while other are appropriate for more aggressive portfolios. For example, I help my 25-year-old son run for his long-term goals and, once in a great while, I find one that is too cheap not to own.

So I put my long-term asset based value portfolios into the Value Line list of stocks with the highest three-to-five-year appreciation potential. It consists mainly of long shots and turnarounds and I have found it to be a fertile shopping list for the entire span of my career. This list requires a private equity mindset and a commitment to holding the stock until it either works of does not work over time. It has produced a few flops over the years, but it has also uncovered tremendous winners that more than offset any of the losers.

Some really interesting stocks make the grade this time. ACCO Brands (ACCO) has been on the list for some time now and it remains one of my favorite long-shot stocks for more aggressive investors. The company makes mundane office supplies such as staplers and shredders, as well as time management and accounting supplies. Business is still pretty weak right now and there are still costs associated with the Mead merger in 2012. However, its long-term outlook seems pretty solid. Its expansion into Europe and Latin America is progressing nicely and the company now does business in about 100 countries worldwide. Any good news could send this stock higher as about 30 days volume, or 15% of the float, is currently sold short. The research service estimates average annual returns of 17 to 40% annually for the next few years. Personally, I think it will be on the high end of the estimate.

I first mentioned Amkor Technology (AMKR) when it showed up in the portfolio of hedge fund manager Paul Isaac earlier this year. The semiconductor packaging and testing company has seen its shares weaken as demand for smartphones and other electronic products has slowed a bit and customers have been adjusting inventories accordingly. The company is expanding its presence throughout Asia and is well positioned to recover sharply when conditions in the semiconductor industry improves -- which many expect could be as soon as next year. This stock could easily double over the next few years.

The cola stocks are well represented on the list as regulatory changes here at home have slowed domestic demand. While it is only for patient investors, the coal industry and stocks including Arch Coal (ACI), Walter Energy (WLT) and Peabody Energy (BTU) all have enormous recovery potential over the next few years. Coal demand from China and India will be growing and U.S. companies will position themselves to export to these faster growing, less environmentally concerned emerging economies.

McDermott International (MDR) has not been able to produce any meaningful good news for some time. The company has posted several consecutive terrible quarters and, as well all know, all that matters on Wall Street is the latest three-month reporting period. As the oil and gas industry will continue to expand worldwide, the long-term outlook is actually pretty bright for the engineering and installation company. It is back in the sub-sea oil business with a recent contract award and that segment of the industry will be among the fastest growing, according to many analysts.

There are ongoing restructuring charges and the usual flurry of shareholder lawsuits that pop up after a decline, but the company is actually in pretty good shape. It has 5x as much cash as it does debt, so the company should be able to survive until business improves. A patient investor who adopts a five-year time frame could easily see 3x to 5x its money out of this stock. Of course, the company has to be something of a takeover target at this level due to the strong brand name in the oil and gas construction industry and the stock's low valuation.

Searching for long shots in the pages of Value Line has been a fantastically profitable activity for me over the years. All three of these names should be serious candidates for a long-shot oriented portfolio. I am really hoping we get enough of a market pullback so I can add the ones I do not already own to my asset-based deep-value portfolios soon.

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