by Tim Melvin | July 2, 2014 6:00 am
One of the most exciting and rewarding things that will happen in your investing career is finding a low priced stock that achieves a monster turnaround. When this happens, the shares often double or triple in price over a few years. If you are really fortunate, the turnaround solidifies to the point that the once-battered stock turns into a growth company and you get one of those stocks that Peter Lynch used to call “ten baggers.”
If you put together a portfolio of potential turnaround stocks and just have a 50% winning percentage, your returns should be more than satisfactory over time. More investors should consider devoting a portion of the portfolio for more aggressive investing in potential turnaround stocks with the potential to return several multiples of the original purchase price.
Here’s a look at three low-priced longshots with huge potential upside.
ACCO Brands (ACCO) is a great example of a longshot turnaround stock with the potential to provide huge long-term returns. ACCO isn’t a particularly exciting business, making things like staplers, shredders, laminating equipment and school supplies. The short-term contains some obstacles like a slow business spending environment due to the weak economy, and consolidation in the office supply retailers may cause store closings that could reduce sales.
But ACCO management is improving its supply chain and trimming costs to deal with the short term problems. The company has also been building cash balances and paying down debt this year. As the economy begins to recover and businesses and consumers loosen the purse strings, the company could easily see double-digit earnings growth for an extended period of time, and we could easily see the stock price double or even triple over the next five years.
Fuel-Tech (FTEK) is another potential turnaround that has the potential to be a multi-bagger over the next five years or so. The company has had weak short term results as it wraps up a large project in South America, and activity in the United Sates has been slower than expected. However, this is a business that is going to grow for at least the next few decades, and the company is well positioned to ride the wave when the trend turns positive.
Fuel-Tech is involved in air pollution control equipment and services, and this business will get more and more attention as the world strives to clean up the air and reduce the overall carbon footprint that industry leaves on the planet. Recent EP rulings should also have a positive effect on sales and profits going forward. It’s very easy to see this stock doubling or more over the next few years.
Leon Black of Apollo Global Management (APO) recently talked about the potential for direct lending to middle market companies. He told investors in a recent conference call that illiquid, more idiosyncratic, non-rated, directly-originated lending markets are providing the best risk return. Apollo Investment Management (AINV) is an asset manager affiliated with Apollo that makes exactly those types of loans and should benefit tremendously from middle market financing for an extended period of time.
AINV has also expanded into the energy-lending markets in North America, which is another segment of the market that should see strong returns for a long time. The firm is organized as a business development company, so it pays out most of its earnings, and the stock is currently yielding more than 9%. As the economic recovery gains strength over the next several years, this stock could easily double to give investors a spectacular total return.
See more in the video below.
As of this writing, Tim Melvin was long AINV.
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