In the last week or so I have eschewed forecasts and predictions and used stock screens to select some stocks that are cheap and could have significant appreciation potential going forward. In a conversation yesterday I was asked what my absolute favorite stock ideas were for 2015. While I have stocks where I like the story better than others, I have learned over the years to keep my starting positions pretty equally weighted. It's a very rare event for me to "load up" on a stock.
With that in mind, I thought I would close out the New Year with a few additional ideas I think value-oriented investors should consider for 2015 and beyond.
I have held shares of ArcelorMittal (MT) for about two years now; I am content to hold the stock for as long as it takes for us to see a stronger global economy. This company is one of the largest integrated steel companies in the world, and as the economy goes so goes the stock price. CEO Lakshmi N. Mittal has said that the worst is behind the steel industry and expects to see stronger demand next year. He sounded pretty optimistic in the most recent earnings release, telling investors: "This quarter's results show the considerable improvement in our steel business, which has more than offset the fall in the iron ore price." He added: "Based on today's market conditions, I do not foresee deterioration in our performance in the fourth quarter." This was a $90 stock a few years ago. If it recovers half that ground this stock is a home run for patient investors.
Shares of Prospect Capital (PSEC) got hit hard this past month, as the company cut the monthly dividend from $0.111 a share to $0.083 a share. Investors tend to flee from a dividend cut, but I have found that more often than not the resulting selloff is actually a buying opportunity. The dividend cut was the result of management restructuring the portfolio to reduce credit risk, and it makes a lot of sense. CEO John Barry III told investors: "We believe there may be upside to our new reduced dividend level, a dividend level we believe we can sustain over the next year and longer even with no dividends or fees from portfolio companies. We also believe we should wait for upside events to occur before committing to any increase in our dividend." That's prudent management in my eyes, and I like the potential for a solid return out of this stock in 2015. Mr. Barry and his fellow executives seem pretty convinced as well, as they have been buying shares of the current bargain price. The stock is yielding over 15% even after the dividend cut.
Apollo Investment (AINV) shares have also sold off the month after a Forbes article questioned its ability to maintain the dividend payout. Apollo is another business development company that has rotated their portfolio in lower risk assets and increased the amount of floating-rate debt in the loan portfolio. Their relationship with Apollo Global Management (APO) and steep discount to asset value makes this a must buy, in my opinion. We may see some volatility in this group during the year if interest rates move higher, but I think both of these end up delivering solid total returns in the New Year.
Finally, here is my Melvin-has-lost-his-mind stock pick for the New Year. I recently picked up a few shares of Medallion Finance (TAXI). The stock is down sharply, as investors are wary of companies like Uber and Lyft making taxis irrelevant and extinct. If this were to happen, then of course all those taxi medallions would be worthless and this company would collapse. I do not believe that will happen. Big cities like Chicago and New York receive substantial revenues from medallion sales and they will not just let that badly needed income go away. We have also seen numerous incidents involving Uber and Lyft driver poor conduct and that will help keep the taxi companies in business for many years to come. Medallion is trading at 89% of book value and yields 9.66% at the current price. I was fascinated to see that Joseph Stilwell, normally a bank stock activist, was a buyer of more than 100,000 shares in the third quarter. I think Medallion Finance can cover most, if not all, of the lost ground in the next year.
Keep in mind as we go into 2015 the largest holdings in my portfolio right now are cash and community bank stocks. The positions I have bought in the few non-bank names of late have been very small. Back up the truck at your own risk.
That's it for 2014. Thanks for being part of the Real Money community, and I look forward to an interesting and profitable 2015.