Although I do run screens looking for long shots, my favorite way is to simply sit down with the new issue of Value Line. I thumb electronically through the issue, looking for stock with enormous upside potential over the three-to-five-year time frame I find most effective.
The list of stocks that has performed poorly in the last quarter and those with the highest three-to-five year appreciation potential, as calculated by the research service, have been particularly fertile hunting grounds over the years. The long shot and turnaround portfolio break from some of my basic valuation tenets and are more of a distressed/private equity view of certain stocks. This approach suits my son more than it does me at this point in my life, but I have an affinity for having a few of these in my personal accounts.
Looking at the list today, I see that a few of my recent longshot picks from earlier this year still make the grade. I am a huge fan of both McDermott (MDR) ACCO Brands (ACCO) and Amkor Technologies (AMKR), all of which still make the grade.
I am hopeful that the politicians will gum things up for a few more days and panic the market. I would love to have all three of these in my classic value portfolios and they don't need to fall that far to trade at a healthy discount to book value.
Central Pet and Garden (CENT) makes the grade as a turnaround as well. The company has seen its share price plummet from over $18 pre-crisis to a little over $7 today.The company has been struggling to get its act together, and saw earnings fall again last quarter.The stock was further punished by disappointed investors.The company has turned its attention to cost controls and that should help improve the bottom line.They have already reduced headcount once and may have to do so again.
Unless suburbs suddenly disappear, the company will have a market place for their lawn and garden supplies, seeds and insecticides. Most of their revenue actually comes from the pet side of the business, with products like treats, toys and animal health products.
Many people I know, including my wife, would take care of their pets before themselves, so that should remain a solid market for the company as well. With a little attention to costs and margins, this stock should have no trouble getting back near the highs in a stronger economy.
Golar LNG (GLNG) is a little higher priced than my usual longshot picks, but this stock appears to have enormous upside. The company is involved in the acquisition, ownership, operation and chartering of LNG carriers and floating storage regasification units. It also has business in the development of LNG projects.
The company owns six LNG carriers and operates Golar LNG Partner LP's fleet of seven LNG carriers and floating units. LNG rates have slipped this year as a result of delays and plant outages. The company actually took two vessels out of service in the second quarter rather than pay the costs of operation. They are expanding their fleet, and other shippers are rushing to get into the LNG business. There may be some excess LNG shipping capacity next year. But this is eventually going to be a rapidly-growing industry and Golar is positioned to be a leader.
The outlook for the floating storage and regasification units is strong right now. Golar commences a new contract in Jordan during 2015, and is considering converting older vessels to FSRU platforms to meet the growing demand. This stock could easily triple as the LNG industry continues to expand. You get paid to wait with this stock as the shares yield 5.1% at the current price.
Investing in turnarounds and long shots may not be for many investors, but it probably should be. Although the short-term volatility of the share prices can be daunting, investing in these stocks forces investors to adopt what I call a private equity mindset. By viewing the potential return five years out and not worrying so much about the daily trading of the companies they own, most investors would see a substantial increase in their portfolio returns.