As always I sat down this weekend and spent some quality time with coffee and the latest issue of Value Line. Most of the time I do a quick run through on Thursday or Friday and do the cover-to-cover thing on Saturday, but I was delayed this week and didn't get to this issue at all until Sunday.
I looked, as I always do, at the list of stocks with the highest three-to-five-year appreciation potential. I have found some very strong longshot ideas off this list over the years, so it is one of the first places I look each week. This week I decided to see what we could find if we scoured the list and looked for these stocks that had enormous long turn potential but also had one of the top two Value Line rankings. This could give us a list of stocks that are ready to turn and begin the long march to huge profits.
It is a very interesting list of stocks. My favorite is one that also has one of the highest rankings for long-term potential. Rowan (RDC) is rated 2 for year-ahead performance, so the service expects the company to outperform the market in the year ahead, and also thinks the stock could more than triple to $70 over the next three to five years. The offshore driller has 30 rigs, but it's the ultra-deep water rigs that could drive earnings. Two of the rigs are in service, one is on its way to the Gulf of Mexico and the final rig is in the final stage of construction. All four are under long-term contracts at higher than average rates.
Rowan may have to take some older rigs out of service, and rates for many of its jackup rigs will decline if oil prices stay too low, but the new, ultra-deep water rigs should help offset the weakness. Of course, if oil prices were to rebound sharply in the next year, we could see huge upside surprises in sales and profits that would make Rowan shares market darlings once again. The stock is cheap at 60% of book value, and the balance sheet is solid, so I like this stock for long-term investors. If the Value Line ranking is correct, investors with a shorter time horizon could see some nice gains as well.
MasTec (MTZ) is one of those stocks that is on my "someday list" of infrastructure companies. They engineer, build and maintain projects for the communication, energy and utility industries, as well as for governments. Business is not bad for the company, but weakness in oil and gas prices has delayed some spending in that area. Someday, we will see a wave of spending on infrastructure projects, but I have no idea when companies and governments will feel comfortable about deploying their cash on the projects.
Value Line thinks the company has huge upside over the next three to five years, with the potential for the price to triple. They also like the year-ahead prospects, as the stock is ranked 2 for year-ahead performance. It is not cheap enough for me on an absolute basis, but the stock does have interesting long-shot potential.
I had to call in the experts for the final Value Line long-shot pick with the potential to beat the market over the next year. I don't listen to music on my computer or phone that much and certainly don't have a radio station app of my phone, but my wife and kids do, and they tell that they do in fact use Pandora (P) on a regular basis. Based on valuation, this stock will not be showing up in my portfolio any time soon, but according to Value Line the company has the potential for a huge turnaround.
As with the first two picks, they think the stock could triple over the three-to-five-year period, and they like the shorter 12-month outlook as well. The revenue and earnings estimates show that the research service expects healthy growth, so the stock could come back into favor with the momo crowd that would launch it on a path to huge gains over the next several years.
Combining long-shot and turnarounds with the shorter-term Value Line outlook is an interesting way to search for stocks that are going to experience mean reversion sooner, rather than later.