Before moving away from the topic of home-run investing, I want to talk about those hitters who might not hit the ball a lot, but when they do hit it the ball lands a long, long way away. These hitters might not be a threat to spray singles all over the field, and you don't want to call for a hit-and-run when they are at the plate, but they can change the game with one swing of the bat.
Harmon Killebrew was a .256 hitter, but when he connected the ball often landed on the other side of the fence. Dave Kingman was one of the most feared hitters in baseball during his playing years but he had a career average of just .236. His average was on the low side but because he covered bases in chunks and not sprints, he averaged more than 75 runs batted in a year over his career. Last year, Chris Davis of the Baltimore Orioles hit just .262 but because 47 of his 150 hits were home runs and 31 were doubles, he drove in 117 runs.
It works like that with what I call long-shot and turnaround investing as well. Far from looking for a single, in this case we have the bat cocked and are looking to hit a long ball. If more than half our hits are for extra bases, then long-shot investing can be as valuable to our portfolio as Chris Davis has been to the Orioles the past few years. I always have a few of these in my portfolio and I can make a strong case for owning more long-shot stocks given the low-return expectations that have settled over equity markets.
Over the years, I have found the best way to search for potential long-ball stocks is to peruse the Value Line list of stocks with the highest three- to five-year total return potential. I view the list using filters of common sense, a sense of some margin of safety and a long time frame. The average holding period of stock ownership is below a year and I have found that most investors have neither the patience to hold a long-shot stock long enough for it to work out or the stomach to tolerate the volatility these stocks usually have. It takes a high degree of conviction to send a low-average hitter to the plate time and time again, but seeing those three-run homers late in the game makes it more than worth the risk.
Looking at the list today, I see a lot of energy-related stocks, but that's an entirely different discussion. I want to focus on the non-energy high-return candidates today and save the energy stocks for a day when I can head directly to the tequila bottle when the discussion is over. To say energy has been unkind to me the past few years would be like admitting the revolutionary crowd was a tad harsh with Marie Antoinette.
Unisys (UIS) makes the list and I am a huge fan of the stock. The cost-cutting moves together with what I think will be strong sales of the Stealth cybersecurity products can lift that stock to many multiples of its current price. Even after a dilutive convertible offering earlier this year, the cost-cutting measures alone are worth something around $2.50 a share in earnings a few years out.
KKR & Co. (KKR) makes the list as well. It is no secret that I am a huge fan of the private equity firms right now. The returns they get over the next five to seven years from real estate purchased the last few years and the energy assets they are buying today should lead to huge returns, and KKR is a leader in both sectors. The new fixed dividend policy results in a yield of 4.7% and management has been fairly aggressive about repurchasing stock. Using cash to invest in KKR funds and deals should pay off far more than the former cash distribution policy, and I think the stock will provide enormous long-term returns for patient shareholders.
There is a place in baseball for hard-swinging home-run specialists and there is a place in investing for long-shot and turnaround stocks. Younger and more aggressive investors willing to hold for years, not months, should probably have a reasonably high percentage of their portfolio in longball stocks that pass the common-sense test.