The macro guys are having an interesting morning. Can the economy really be strong enough for the Federal Reserve to raise rates when producer prices are down for four months in a row?
Should stocks continue to move higher when the estimates for earnings growth in 2015 are now just 1.7%?
That depends heavily on a strong second half of the year. Can we continue to think the consumer is back when retail sales have been down three months in a row and consumer sentiment is down to a four-month low? It is all fascinating to contemplate and discuss.
But for now I am spending more time with the new edition of Value Line. I am looking for stocks that might go up several multiples of my purchase price during the next few years. Political and economic news is for after work discussions and I try to keep that from entering into the stock selection process in a meaningful way.
Spring training is under way down here in Florida and everyone is looking forward to the return of the baseball season. My Orioles appear to be built to win by the long ball with a lineup heavy with guys who can drive it out of the park. So is my second favorite section of the weekly Value line report.
The second page I go to is the list of stocks with the highest three-to-five-year total return potential. This is a list of higher risk, higher reward stocks that have or will be huge winners if they pan out. I am a little older now, so it is not a big part of my portfolio, but I do counsel my kids to spend a lot of time reviewing this section of the report each week.
The list is dominated by energy stocks this week. I have discussed energy stocks several times in recent months, so I feel no need to revisit them at length today. Looking at the non-energy stocks turns up a few interesting ideas that could pay off big for aggressive, patient investors.
Apollo Investment (AINV) is one of my favorite long-term holdings. The business development company provides loans and makes investments in middle market companies. This is a market that is expanding as banks de-risk their loan portfolios. This company has a relationship with Apollo Global Management (APO) that helps them see deal flow not available to competitors. They also can draw on the multi-decade experience of some of the best private equity investors in the world.
They have some exposure to the energy sector. That is a short-term negative but it could actually be a large long-term positive for the firm. They have taken steps to reduce credit risk by focusing on secured loans that should benefit the bottom line going forward.
The stock is trading at about 90% of asset value and yields over 10% at the current price. Value Line estimates that the share could return 30% or more annually for the next several years.
Daktronics (DAKT) is an interesting little company that makes the list of potential large winners. This company makes scoreboards and other large electronic displays. They do business with sports stadiums around the countryand just announced they were installing a large video display board in Citi Field for the New York Mets.
This is the company that made the largest video display in the world that is in EverBank Field, home of the Jacksonville Jaguars. It is putting in the new display at Petco Park, the stadium used by the San Diego Padres.
They also make LED displays used in road management, parking, mass transit, and aviation applications. Due to the large-contract nature of the business, earnings will always be lumpy and unpredictable, but this is a pretty good little business. Value Line thinks that the stock can reach somewhere between $20 on the low side and $33 on the high side. Either outcome is a nice return from the current price or you get paid to wait as the stock yields 3.8%.
Long-shot investing is not for everyone. But if you are patient and willing to tolerate higher volatility, the payoffs can be enormous. If you have a higher than 50% win rate, you will end up outperforming most professionally-managed funds and hedge funds over time.
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