Tuesday I wrote about potential turnarounds that look like they may not turn at all in 2015. Using Altman Z-scores and Piotroski F-scores to find stocks whose recovery was likely to falter in the early stages worked very well in 2014, and it should work in 2015 as well. Last night it occurred to me that inverting that should help us find stocks that have a good chance of recovering and being big longshot winners in 2015. I searched for stocks that had a poor showing last year but had high F and Z scores, indicating a safe balance sheet and improving fundamentals. To tip the odds of success a little more in our favor, I also limited my search to those stocks that had recent insider buying.
I have a weakness for recreational boating stocks. I spent many years running around the Chesapeake Bay with friends and I can tell you that boating is more of a lifestyle than a hobby. Rough economic times may mean purchases are delayed but boats will eventually be upgraded and new gadgets purchased. Marine Products (MPX) sells a wide range of pleasure boats, including sportboats, deckboats, cruisers, sport yachts and sport-fishing vessels. The Atlanta-based company sells its boats all over the world and the weak global economy has kept sales growth relatively flat.
The numbers seem to be telling us better days are ahead for the company and its stock. The F-score is a strong 8 and the Z-score is a very high 11, so finances are solid and business is improving. One director was a buyer of the shares in November and the company repurchased nearly 25,000 shares of its own stock in the fourth quarter of the year.
Heritage-Crystal Clean (HCCI) has had a tough year; its shares dropped by more than 30% in 2014. The company is in the type of messy business that I love: It provides parts-cleaning, used oil re-refining and hazardous and non-hazardous waste services to small and mid-sized customers in the manufacturing and vehicle service sectors. Earnings have been growing nicely all year but Wall Street apparently doesn't think much of its FCC Environmental and International Petroleum acquisitions, or the unplanned shutdown of the Indianapolis used-oil re-refinery that will be a drag on fourth-quarter revenue.
Heritage-Crystal Clean has completed an offering of 3.1 million shares to pay down the debt used to fund the recent acquisitions, and the stock is starting to work its way higher. The F-score is a strong and the Altman Z-score is a very comfortable 4.8. We have seen insider buying in the past few months, and the stock could have a strong performance in 2015.
Although the numbers and insider activity appear to point toward a turnaround for shares of Encore Wire (WIRE), I have to be honest and say that I hope the numbers are dead wrong. Encore makes wires and cables for use in interior electrical wiring in commercial and industrial buildings, homes, apartments and manufactured housing. While I am in the camp of a slower-than-expected housing recovery, I do believe that housing will fully recover eventually, and I would love to see short-term disruptions knock another 50% or so off Encore's stock price so I could buy at half of book value and own it for the next decade.
Unfortunately, the number and insider activity are telling me that I might not get that chance. The F-score is 6, so the company's prospects are improving and the Z-score of 10 indicates the company is in rock-solid financial shape. At least one director is positive about the future, buying shares in the open market last month.
While these are far from classic value stocks that might normally catch my eye, these three stocks have the potential for large turnarounds in 2015 that could drive the stock prices to recover the ground lost in 2014. The numbers tell us that conditions are improving and the balance sheets are safe for these companies, and that could catch the eye of bargain-hunting institutions in the early part of the New Year.
If I were an investor looking for turnarounds or a trader with an eye toward catching strong moves over the next few months, these stocks would be on the top of my list.