Last night, I was sifting through a bunch of paperwork and reports when it occurred to me that it had been a long time since I ran a screen that had produced strong results for me in the past. S&P Capital IQ is one of the most respected and widely used research services in the world. Most online brokers give access to the service as part of the services provided to their customers.
They offer their STARS (Stock Appreciation Ranking System) program that ranks stocks from 1 to 5, with 5 being the stocks that should outperform the market by the widest margin and 1 being the projected worst performers in the year ahead. They use several factors, including macroeconomic and company-specific factors and industry developments and trends to formulate their rankings, and they have worked pretty well over the years.
I look for low priced stocks that can outperform by a huge margin over the years and have picked some pretty big winners. I simply look for 4 and 5 Star rated stocks that are trading for less than $10 and then do a little qualitative research on my own to see if I like the story. I went back and checked out some older articles using this approach, and the year-ahead returns on the low price high start picks were pretty extraordinary. With that in mind, I looked this morning for some companies trading below $10 that had 4 or 5 star ratings from the well-respected research service.
There are some surprising picks on the list. I am sure David Einhorn will be relieved that his two problem child energy picks are on the list. Chesapeake Energy (CHK) has been a huge loser for everyone that has gotten anywhere near the stock. Einhorn, Carl Icahn, Southeastern Asset mangment and Harris Associates are just a few of the well-known investors that have been hammered by the second largest natural gas producer in the United States.
The company has had its debt downgraded and there are some who think it could be forced into a bankruptcy restructuring. S&P notes that the voluntary debt restructuring, large cash stockpile of $1.8 billion and the prospect of future debt restructurings may have the company in a better position that many realize. If natural gas pricing improves this stock could surprise the skeptics and a have a big year. Having said that, this is a stock suited for Babe Ruth investors who are willing to swing away for a long ball without fear of striking out.
The same can be said for CONSOL Energy (CNX). Both Mr. Einhorn and Southeastern have a position in this stock as well. The company has cut its coal exposure in the past year and its future is no much more dependent on natural gas as it is one of the largest producers in the Marcellus and Utica shale fields. It is not for the faint of heart, but the upside could be enormous. CNX gets the top rank of 5 stars from S&P Capital IQ.
Amkor Technologies (AMKR) is another low priced, high star stock with the potential for substantial one year returns. The semiconductor testing and packaging company has shown up in the portfolio of Arbiter Partner, which increased its stake in the company in the third quarter by more than 25%. Demand from the wireless and smartphone markets should help drive growth for Amkor going forward. Improving market demand along with management's effort to reduce balance sheet leverage could drive this stock to high returns in 2016 and possibly well beyond.
They also like one of my previous long shot picks that so far has not exactly accelerated or excited. Hovnanian (HOV) is still in the early stages of what is going to be a long protracted turnaround process. A slowly improving housing market has helped the company begin the process, as backlogs are higher as we go into 2016 and the new home market seems to be slowly grinding higher around the United States. The company will not pay tax on the next $2 billion or so of deferred tax assets, and that could help increase the liquidity and stability of the company and its balnce sheet. Again, there is a Babe Ruth element to this stock, but if it works it is going to work very big.
S&P Capital IQ has been a reliable source of stock research for almost 100 years. The STRS system has done well over the years, and using it to pick low priced stocks with long shot upside potential has worked for me over the years. It is worth noting that if your broker does not give you access to S&P Capital IQ reports, many libraries around the U.S. do have a copy in the branch. It is worth taking the time to review the service and rankings at least on a monthly basis.