I won't waste your time telling you what I think the stock market will do next year, because I have no idea. I don't know how many times the Federal Reserve will raise rates in 2016, nor where oil or the 30-year Treasury yield will be next Dec. 31.
What I can do is give you my three favorite "special-situation" stocks for the next couple of years. It will probably take a while for these stocks to reach their full potential, but I think all of them can eventually return not just a few percentage points, but several multiples of your investment.
I've mentioned all three before, but I like them more today than ever before. They are:
Volt Information Sciences
Staffing-services company Volt Information Sciences (VISI) had a disastrous run when an accounting scandal cropped up a few years back. It took several years, tens of millions of dollars and a U.S. Securities and Exchange Commission settlement, but that's all behind VISI now.
Activist investors have gotten involved with the company, and the firm has made changes to its board and management over the past year. VISI has also sold non-core assets, and I anticipate it'll use the cash to buy back shares. Officers and directors have certainly been buying the stock, and everything seems to have improved -- except for VISI's share price.
I agree with David Neuhauser of Livermore Partners, who told me earlier this year that if Volt can simply earn industry-average margins, the firm could easily make $1.50 a share or more in 2017.
At even a 10x multiple, that implies almost twice the stock's current price of roughly $8 a share. And if VISI catches up to the industry average of a 17 to 20 P/E, you're looking at a stock that can quadruple -- or more -- over a few years' time.
Unisys
Peter Altabef, who took over as new CEO of troubled Unisys (UIS) earlier this year, has done successful turnarounds before. He revamped both Micros Systems and Perot Systems and sold them for pretty good profits.
Now, Altabef has identified $200 million of annual cost savings at Unisys, and he expects they'll be at a full run rate by 2017. That's $4 a share of savings for a stock that currently trades at around $11.
Altabef has also started changing Unisys' sales culture, appointing new sales leadership to create a more vertical sales approach. The company's award-winning cyber-security system (known as "Stealth") could also serve as a big sales-and-profit driver.
I believe a successful turnaround at Unisys is underway, and I think the stock could rise to $30 a share or higher over the next couple of years.
Kratos
I'm a big fan of Kratos Defense and Security Systems (KTOS), and it seems like I'm not the only one. David Peltier of Stocks Under $10 selected it as one of his best ideas for 2016 yesterday, and the stock was up 7% on the session (plus another 2% or so as of this afternoon).
KTOS is involved in all of the hot spots of defense spending -- drones, satellite communications, critical-infrastructure defense and cyber-warfare/security. All of those seem likely to be high-growth industries in the years ahead, and Kratos should benefit.
Although KTOS only trades at around $4 a share right now, it was once a $30 stock. If shares can just get halfway back there, they'll be a home run for investors who buy now.
The Bottom Line
Again, I have no clue what the stock market will do in 2016. But I do know that based on fundamentals, the three stocks above all have the potential to provide huge gains for you -- no matter where the S&P 500 winds up next year.
