What Makes for a Good Spec Play?

We all dream of hitting the big one, a stock that doesn't just go up 10% or 20%. We want a position that can double, triple or even quadruple. How can you recognize these kind of stocks? Some key factors to look for: 1) Very depressed share price versus previous peaks. 2) Below-average profit margins, which could bounce back to prior levels. 3) Solid balance sheets -- no risk of bankruptcy. 4) Insider buying at, or above, the current price. Why are those items so important? It's much easier for a stock to revert back to old price points than to break out to huge gains from high points. A stock that dropped from $100 to $25, then rebounds to the old starting point, gains 300% for those who bought in at the low. Those kind of moves happen more often that you'd think. Poor profit margins can be temporary. When they rebound, EPS can rise dramatically, lifting the share price through both better earnings and via multiple expansion. Good finances ensure that you'll have time for things to turn around without undue pressure from creditors. And corporate insiders know best what a company is truly worth. If they are buying when news is bad and shares are depressed, you can have confidence better news is not too far away. Fiesta Restaurant Brands , operator of Pollo Tropical and Taco Cabana now meets all of my criteria for potential huge gains. The shares peaked at $69 back in 2015, when EPS hit $1.52 on profit margins of 5.9%. This year, FRGI dipped as low as $12.27 after EPS fell to $0.60 on profit margins of just 2.4%. Revenue per share has held up nicely, though, meaning there is large upside if margins revert back to more normal levels. Value Line's analyst thinks margins will improve to 3.1% in 2019 and 4.2% next year. Even those modest changes would likely send EPS to $0.80 and $1.15, respectively. That would be 33% higher year-over-year in 2019 and an additional jump of 43.7% from 2019 to 2020. Within five years, he sees FRGI's net profit margin setting a new record high, at 7.7%. If Fiesta gets margins to 5% again, there's every reason to project $1.37 or more in EPS within a year or two. Fiesta has never traded for a low P/E. Its typical multiple ran between 22x and 41x forward estimates. Assuming just a partial profit margin pick-up, that supports an end of 2020 goal price of $25.30. That's almost 81% above where FRGI closed on May 20, 2019. That goal is far from an upper limit. The shares peaked between $30.20 and $69 during each of the full years 2013 through 2018. FRGI has a B+ financial strength rating from Value Line. That's adequate to avoid any serious problems on the debt front. Insider trading activity in FRGI is very bullish. The firm's CEO made a $50,000 purchase on March 1, 2019. Jeffries Financial Group made six separate buys from May 9 through May 13, 2019, totaling over $8.6 million. Fiesta Group has all the makings for a monster move higher. Plus, you can buy in now cheaper than the CEO did last March. Option sellers can lock in juicy premiums by shorting some Dec. 20, 2019 expiration date puts at $15.00 or $17.50 strike prices. Worst-case break-even prices dropped to either $12.70 or $13.50 on May 21, 2019, when FRGI was quoted at $14.15. Speculative plays are less predictable than more-conservative blue-chip investments. Most higher-quality shares, though, don't offer the chance at hundreds of percent in upside. Other good-looking spec plays include Realogy , United Natural Foods , Interface and Thor Industries . Check them out to see if they meet your own criteria for inclusion in portfolios.

What Makes for a Good Spec Play?

Fiesta Restaurant Group could be a good value stock to consider for your portfolio.

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