Yesterday, I spent some time looking over various articles and recommendations from the past year. Generally speaking, I am pretty pleased. We had a few turkeys this year, but most of our stocks have done pretty well.
What really leaped out in my review was the almost spectacular performance of the long-shot recommendations. Using Value Line to find stocks that have superior rankings for three- to five-year appreciation potential and adding my own filters has produced some spectacular returns. There are more than a few doubles and triples as well as a plethora of 50%-plus gains. Betting on long-shot banks that are being recapitalized, have more than 3% troubled loans or have a large private-equity ownership has also worked extraordinarily well over the past year.
With that thought in mind, I sat down this morning and ran the Value Line filters to see what long-shot candidates might lurk in the current list. I quickly scanned the list for banks, as that is still one of my favorite long-term sectors right now. Citigroup (C) is on the list of stocks with potentially large long-term gains, but I just cannot pull the trigger on this one. I don't think anyone actually knows what the bank is worth, and much of the earnings have come from reserve releases and trading.
Another bank we have mentioned before is on the list as a potential long-shot candidate. Popular (BPOP), the holding company for the Puerto Rican Banco Popular, has improved somewhat but it is still really cheap. The shares trade for half of book value right now, even after the recent stock-price improvements. Nonperforming assets are falling, and net charge-offs are of the lowest level of the past four years, so the balance sheet is slowly healing. Management continues to reduce problem assets though sales of loans and assets. It is a slow process, but it is working. As the economy eventually improves, this stock could easily double or more over the next few year.
There are some old favorites on the list as well. One of my favorite oil-services firms, Nabors (NBR), makes the grade. Slowing activity has hurt the world's largest land-drilling contractor, and this is reflected in the stock price. The company is using the slack time to focus on sales of assets and spare equipment to pare down debt levels. When drilling activity eventually picks up, this company will see a rapid increase in demand, and the stock will once again be an energy growth favorite. That may be 2014 before it happens, but the stock could easily triple over the next five years.
JetBlue Airways (JBLU) is the only airline on the list this time. This stock is for very patient investors only, but it has a lot of upside from current levels. The airline is seeing strong demand for its East Coast flights and is continuing with plans to expand into the Caribbean. The recent earnings report showed solid increases in demand and yield, with bottom-line profits rising by 27%. The airline industry is one of the toughest for investors, but this stock is cheap and does not have the same obstacles as many of the larger legacy carriers.
Speaking of patience, Tecumseh Products (TECUA) is still on the list of long shots. The company needs to see a full-on economic and housing recovery for business to pick up and drive the stock price higher. Since the stock trades at a third of book value and generates positive operating cash flow, I am willing to wait for things to improve. This stock traded well over $35 a share just a few short years ago. Regaining a fraction of that level would be a huge return for those who buy at the current price.
Long-shot investing is not for everyone. Many of the stocks on the list will not do very well, and a few may even disappear over time. Some of these stocks will see an improvement in their business and prospects and soar in price. If you have a batting average of .500 or better, long shots can be a source of solid wealth gains for aggressive, patient investors.