Scanning the List of Long Shots

 | Oct 12, 2012 | 2:30 PM EDT  | Comments
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sne

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tecua

I could add my voice to the clamor this morning trying to interpret every spin of the news. We have seen some big bank earnings from JPMorgan (JPM) and Wells Fargo (WFC) as well as the producer price index numbers. Since I view these numbers as just background noise in the market, I will resist the temptation.

Instead, I will keep with the theme being established by My Orioles and flip through the latest edition of Value Line, looking for some long-shot stocks. Each week, the research service publishes a list of stocks that have the highest projected three-to-five-year returns, and it is a fertile shopping ground for aggressive investors looking for stocks that can pay off in multiples instead of percentages.

One of the names on the list is a stock that has been somewhat controversial this year. Management of Zynga (ZNGA) has been correctly criticized for selling shares post-IPO before the shares crashed from over $11 to below $3. The shares now trade for less than 2x cash and about 1.2x book value. However, the company is losing money and is not expected to turn a profit anytime soon, so this is a very speculative stock.

For now, the stock is very much tied to Facebook (FB) as its major platform for games, and many investors view that as a drawback. The company has been cutting costs as losses mount, and it is trying to reposition itself as a multiplatform game network. If Zynga succeeds, its stock could rocket. If it doesn't, this one could easily end up on the scrap pile of tech-stock history. At this price, it is something of an option on the social gaming business. I will probably tell my son to buy a little bit of this one. If it works, you will make a very nice profit over the next few years. If it doesn't, you will lose a couple of bucks and move on.

I never expect to see larger, more well-known companies on the list, so I was a bit surprised to see Sony (SNE) as a potential long-shot stock in the current edition of Value Line. For most of my career, Sony has been a solid Japanese blue-chip that offered market-matching potential and not much else. However, weakness in the core LCD TV business, continued weakness in the global economy and hacker attacks have driven the stock down close to single digits. The global recession has been hard for Sony, and it has lost money for the past four years.

Sony could be about to set the stage for a powerful turnaround. It has moved into newer markets, including such high-growth areas as smartphones, tablet devices and lithium batteries. There are signs that the LCD business could improve as early as next year, well ahead of Wall Street's expectations. With $81 billion in revenue, Sony is one of Japan's largest exporters and one of the world's best-known brands. Right now, the stock trades near the lows of the decade, provided we are talking about the 1980s. The shares last traded at these levels in the late part of that decade. The company has a solid balance sheet with almost $20 billion in cash and should be more than capable of surviving until the economy improves enough to start thriving once again.

Given the weak global consumer electronics market, internal problems with Japan's economy and natural disasters hurting production capabilities, the stock has fallen out of favor and is ignored by most investors and analysts. This is a blue-chip fallen angel trading near, if not at, the point of maximum pessimism.

Tecumseh (TECUA) remains on the list, and investors should accumulate this stock on weakness if they do not already own the shares. Improvement in global demand for construction and commercial refrigeration should start to improve over the next couple of years, and that could lift this stock back near the old highs. It will be a boring and tepid stock to own until it is not. Then I think it could be on the more profitable stocks you have ever owned.

My time is better spent shopping for long shots than trying to evaluate rather meaningless short-term earnings reports. Finding one Sprint (S) or Kimball International (KBALB) a year can make up for a lot of mistakes. Finding long-shot winners is a much more productive exercise that trying to interpret and game various news events and noise.

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