Last night I spent some time on the phone talking to my son about a wide range of topics. We covered the most important one first: Do we go to opening day or wait until Monday when the Yankees come to town? In the spirit of fatherly excess, I suggested doing both.
Eventually the topic turned to the world, business, the economy and the stock market. My son is working his way up the managerial ranks with a large storage facility company and is starting to generate a little excess cash. He is finally ready to have a serious talk about investing. I gave him a couple of books he needs to read and told him we would talk about it this weekend and I would start teaching him what he needs to know.
The first thing I am going to tell him is to take the advice of David Nierenberg at D3 Funds: Look for investments that will return in multiples, not percentages. If people tell you that they like a stock because it may go to $24 from $20 over the next 12 months, ignore them no matter how good the story is. Unless you decide to become a trader and hang around people like Bob Byrne and Tim Collins all your life, look for stocks and other securities that can return you four or five times your money or more over a reasonable period. If you are right at least half the time, you will outperform all the fund managers and so-called professionals. If you are right more than that, you will become wealthy at a relatively young age. Focus on long shots and you will get plenty of places and shows, along with some exactas and trifectas.
If I were a much younger man, I would focus entirely on certain types of long shots that could return many times my original investment in five years or so. As it is, I devote a portion of my portfolio to these stocks as I count on them (along with my "trade of the decade" bank stocks and mix of safe and cheap securities) to pay for the final college tuition, two weddings and a comfortable retirement over the next decade.
There is a process to finding potential long shots. The first thing I will tell my son to do is take some of his pub money and buy a subscription to Value Line. As Warren Buffet, Walter Schloss and a host of other investors have said, they could probably run their businesses with just Value Line if absolutely necessary. One of the things I do every week is find the screen for stocks with the highest annual predicted return. Let's look at a couple of potential long shots I found.
Cross Country Healthcare (CCRN) was something of a growth darling back in 2006 but it tumbled along with the economy. Now there are signs that business is improving and earning should be back on track this year. The company provides traveling nurse and health care staffing, as well as physician and clinical staffing services. It has been hurt as hospitals and other health facilities focus more on cost controls. But a shortage of nurses and other hospital-based health professionals is developing, and this is very bullish for the company. If earnings recover back to 2008 levels, this stock could easily triple in value over the next few years.
Fuel Tech (FTEK) is another potential long shot that intrigues me. The company is in the air-pollution-control business, and I believe that is a growth industry. The company sells its processes and engineering services to industrial companies and power generation utilities globally. Increasingly strict environmental regulations in the U.S. should provide a steady source of business for FTEK, but the real opportunity is in emerging markets. China alone will have a market for emission control and cleaning that will be at least three times the size of the U.S. domestic market. In a shrinking global business world, even emerging markets are going to have to pay attention to air pollution concerns and control their emissions. Fuel Tech should benefit. If it can capture healthy market share, this is another stock that could easily triple in value. If it becomes a growth-and-momentum story again, as it was earlier this decade, the price could soar toward the old highs.
When I look at this list, I also see natural gas and coal names showing up as stocks with very high long-term price potential. So do some of my favorite non-legacy airlines, like Southwest Airlines (LUV). I see enough of my current holdings of safe and cheap stocks on the list that I am comfortable with the long-shot list as a source of solid stock ideas.
I will tell my son that this is the first step in the long-shot research process.