It has been a while since I scoured through the Value Line weekly edition for long-shot stocks to talk about. Part of this is that other endeavors like small banks and natural resources stocks have taken up a good bit of my time. Flipping though the most recent issue, the list of stocks with three- to five-year appreciation potential caught my eye, however, and some on the list are worth considering by aggressive investors looking to cash in on a long shot or three.
My first observation is that, to a great degree, the list of high potential return stocks resembles an energy index fund. Usually the list consists almost entirely of smaller stocks, but this week's includes some of the larger oil drillers. Noble (NE), Rowan (RDC) and Transocean (RIG) make the list, with projected gains of more than 150% over the next several years. So do energy-related names Pengrowth Energy (PGH), Diamond Offshore Drilling (DO) and Tidewater (TDW).
Energy is on sale at the stock exchanges and unless there is a deep depression that lasts for years, these stocks should experience substantial price recovery. It's probably not for the faint of heart, but I believe patient aggressive investors should do very well with these stocks.
An energy name tops the list of potential long shots. The research service estimates shares of ION Geophysical (IO) could rise by as much as 400% over the next few years. Like everyone in the seismic data business, the slowdown in spending has weighed on the results of this company, but there are some bright spots. The software segment reported record earnings in the second quarter. ION used its free cash flow to pay off its revolver balance in the quarter. Adjusted EBITDA rose 33% in the first six months of 2014 compared to 2013. In addition, the company has had some recent contract wins that should drive revenue growth this year. The stock probably won't do a lot until the major oil companies pick up exploration spending, but as that happens next year, the shares could recover quickly.
One non-energy stock that caught my eye is a homebuilder. While I am nowhere near as enthusiastic about the housing market as some pundits and economists, I do not see another collapse. I expect a slow recovery that takes much longer than expected. Value Line has high long-term expectations for shares of builder Hovnanian Enterprises (HOV). This really is a long shot, in my eyes, because Hovnanian is leveraged with $1.6 billion in debt. I would call it something of a "survive until they thrive" bet. The company has been around since 1959 and weathered a few down markets in housing, including the recent meltdown, so it's not a bad bet to assume it makes it through this time as well. I would look at Hovnanian as an undated call option on the long-term prospects of the U.S. housing market. Value Line thinks the stock could rise by as much as 255% over the next few years so the potential payoff is enormous.
The retail sector has almost as many companies on the list as the energy sector. However, I am a huge skeptic of retail. It has generally been my experience that when a retail stock falls out of favor with consumers and investors it is less than 50-50 that it regains the affection of either. Nevertheless, I believe Big Five Sporting Goods (BGFV) is suffering from tough comparisons as a result of last year's gun rush, and that business will level off going forward. Value Line estimates the stock could climb 160% over the three- to five-year period, so it's an interesting name at this price.
I want to reiterate two things. These are long shots, not classic value picks. I have done pretty well with my long-shot picks over the year, but more than one blew up in my face and dropped precipitously. These stocks are for aggressive investors with a great deal of patience, as they probably will take three to five years to work out. Having said that, if you fit the profile of a long-shot investor, there are some potential home runs in these stocks if you have the time and fortitude to own them.