Last night I spent some time looking for more "asymmetrical payoff stocks." I define these as long shots where I can risk a little, but if the companies recover to their full potential, even a small position will have substantial rewards.
The best way to find these stocks with potential high returns is to peruse the list of stocks Value Line Research provides each week as having very high three-to five-year potential. I then apply a private-equity mindset and search for those companies that make sense and seem like good candidates to survive long enough to provide a payoff.
Value Line's current list offers some interesting ideas, including several hospital stocks. Hospitals are one of the few groups that have been punished since the election. Hospitals have fared well since the Affordable Care Act reduced the number of uninsured patients that showed up for treatment. Now, with the incoming president committed to overturning the legislation the fear is that hospitals will once again find themselves treating the uninsured with no reasonable hope of ever getting paid.
It's unclear how this will all play out over the long run. Killing Obamacare is a great campaign theme, but a full execution of the Affordable care Act will be politically and financially difficult to implement. Donald Trump has pledged to have a plan ready to take its place before dumping the existing health-care laws, but I don't believe dumping the uninsured back in hospital emergency rooms would be a workable fix.
Two hospital stocks are among the top potential performers. Tenet Healthcare (THC) is trading at five-year lows, and Value Line thinks the stock has a chance to more than triple over the next three to five years. It is not a risk-free proposition, however, as Tenet has high levels of debt and higher-than-expected costs associated with the Vanguard Health acquisition are weighing on its bottom line.
It's worth noting, however, that Tenet has been around since 1967 and weathered various health-care panics many times before. I expect it will weather this one as well.
Community Health Systems (CYH) is taking a more proactive approach to reducing its debt. The company has committed to selling 17 hospitals, which will net about $1.2 billion. It is also working with advisers to review options and alternatives, and I don't think you can rule out a sale of the company at some point. Although Community Health is not a low-risk investment by any stretch of the imagination, the stock could easily triple, or more, over the next five years if the company is successful in reworking its balance sheet and business.
While I have not purchased any yet, I am intrigued by hospital stocks. Hospitals are a necessary part of our medical infrastructure, and any new health-care legislation has to make it possible for them to survive and profit. The sector is likely to be very volatile and driven almost entirely by headlines for the next several months, but it also appears to be provide significant long-term opportunities. If I were running a private-equity fund today, I would be taking an extended look at acquiring a portfolio of hospitals on the cheap amid the current uncertainty.
Speaking of private equity, these firms are also well represented on the list of potential high-return stocks. I have been pounding the table on private-equity stocks for some time, and it appears Value line agrees with me. In their industry overview of the group, the research firm's analysts note that, "Shares of the firms in the Public/Private equity space offer wide long-term potential. Indeed, many offer strong appreciation possibilities over the coming years thanks to good prospects for higher earnings. Also, the yields here are often robust and well covered by earnings."
KKR (KKR) , Blackstone (BX) and Apollo Global (APO) are all on the list, with KKR listed as having the highest potential three- to five-year return. All three are expected to return more than 25% annually over this timeframe.
Private equity is one of the highest-performing asset classes and owning shares of these firms gives us a chance to participate in both their investment returns and the fees they generate from their funds. These names can be very volatile, so I would use the market's ups and downs to accumulate on the cheap with the idea of owning them for a very long time.
Tomorrow, we plan to do even more long-shot shopping as I've found some fascinating stock ideas on this current Value Line list that should do well regardless of the market's gyrations over the next several years.