I want to talk about a few more of my discoveries on the current list of stocks with high three to five-year appreciation potential, revealed by the present edition of Value Line. I have been using the list of potentially undervalued high-return stocks that the service publishes to find potential long-shot winners for years now, with lots of success. The math of longshots is compelling as, if you are right half the time with your picks over that three to five-year period, you handily beat the market. If you are right much more than half the time, you are performing like a legend.
Keep in mind that I view these companies with a private equity mindset. When I buy a longshot, I am thinking about three to five years or longer as a holding period. If something happens sooner, that's fantastic, but as long as the potential remains intact and financial conditions have not deteriorated entirely, I am content to hold them and let time do the heavy lifting.
FireEye (FEYE) does not fit into the classic value mode by any stretch of the imagination, but it does play nicely with my cyber security 100 to 1 theme. This company provides cyber security solutions for detecting, preventing, analyzing, and resolving cyber-attacks. Subscription and service revenues now account for about 60% of total revenues, giving the company a much better base from which to grow than relying on single product sales. Cyber security is the key to all of the current innovative markets, which are expected to be the growth driver over the next few decades. Robotics, the internet of things, Fintech and a host of other exciting markets are heavily reliant on cyber security. It will probably be a wild ride, but this stock can easily double or more over the next several years.
An old friend is on the list this time. I did very well the last time I purchased shares of Consolidated Water (CWCO) , and it has now pulled back to levels where it may once gain offer excellent total return potential. Consolidated develops and operates seawater desalination plants and water distribution systems in the Cayman Islands, The Bahamas, Belize, the British Virgin Islands, and Indonesia. It is also building a new $500 million facility that will serve the Baja California region of Mexico. Demand for water is growing in all of these locations, and they do not have access to abundant sources of potable water, so Consolidated is well positioned to grow for a very extended period of time. I think the stock could double as a base case scenario for patient, aggressive investors over the next five years. Much more substantial gains would not surprise me in the least.
News Corp (NWSA) could be well positioned for gains in the years ahead according to Value Line. The big drag on this stock has been the perception that it is a spin out of Rebert Murdoch's toys, particularly the newspaper businesses, but when I dig into the business mix I like what I see. I have done pretty well with newspaper investing by buying them during selloffs. It may not be a growth industry anymore, but News Corp has a solid collection of papers including the Wall Street Journal, Barrons and the New York Post. They also have an extensive collection of Australian and UK newspapers that provide quite a bit of cash flow.
I like the newspaper assets, but there is a lot more here than just newspapers. News Corp also owns book publishers, gaming and digital betting sites and real estate related websites. The digital real estate business grew by more than 21% during 2016, and I think the company will focus more on improving this part of the business in the future. They are expanding their mobile and online offerings related to the newspaper and publishing companies, and that should also help drive future earnings growth for News Corp. The Dow Jones services including Dow Jones Risk & Compliance, Dow Jones Newswires, and Dow Jones VentureSource remain very much in demand.
I have not purchased News Corp shares, but I think I will have to in the very near future. This may be the perfect Tim stock. I can see owning a company that sells newspapers and books and also offers financial and real estate information services as well as a betting service. If it also had a small winery, this would be the ultimate Peter Lynch "own what you buy" business for me. Value Line estimates that the stock could be 2.5 to three times higher than the current stock price in three-five years and I think it can go a lot higher than that if you are willing to give it a decade or so.
Longshots are not for everyone, but if you take a long-term view and have the stomach for volatility, they can be very rewarding.