2 Hero-or-Zero Stocks With Big Payoff Potential

by Tim Melvin | February 10, 2014 6:00 am

For the most part, I stay pretty true to my deep value roots and keep most of my money in stocks that fit my “safe and cheap” criteria. But I confess that I usually like to own some longshots and turnarounds that might not fit the criteria exactly.

stocks-to-buy-now[1]I call these hero-or-zero stocks, as I expect to either get back four to five times my money in a few years … or see them go off the board. I have found over the years that if I have a 33% win rate on a package of these stocks, I pretty much match the overall market.

And when I’m fortunate enough to have a 50% win rate, my longshot and turnaround picks crush the broader market over the holding period.

When I look for these stocks, I like to look for stocks that used to trade a lot higher and have stumbled down into the single digits. I run two screens when I look for longshots — one with and one without dividend payments. I have a preference for the dividend-paying issues, but it’s not set in stone as a policy. I also like to see some measure of insider or smart money buying to give me better odds of hitting a monster home run rather than striking out.

Atlantic Power (AT)

Atlantic Power (AT[2]) is a great example of a hero-or-zero stock right now. The company owns and operates a wide variety of power generation and infrastructure assets in the United States and Canada. Right now, it has twenty-nine operational power generation projects across eleven states in the U.S. and two provinces in Canada as well as a biomass project under construction in Georgia.

The company is heavily leveraged and not a lot has gone right for the firm over the past couple of years, as proven by Moody’s recently downgrade of ATN’s debt. The stock has fallen from more than $15 a few years ago to around $2.17 today. However, there is tremendous value in the asset portfolio, and if the company improves cash flowers as the economy strengthens, this stock could fly upward.

The current yield is more than 15%, but I’m certain we’ll see another dividend cut or even elimination before too much time goes by. Renaissance Technologies owns almost a million shares of the stock, and insiders were buying back in September, so it passes the smart money test … albeit barely.

EXCO Resources (XCO)

Exco Resources (XCO[3]) has seen it profits and stock price crushed by falling natural gas prices. The company was slow to try and turn its production mix toward more profitable natural gas liquids and oil, and it paid a price for that decision.

Exco just did a rights offering to raise capital for drilling projects and investors like Howard Marks of Oaktree Capital (OAK[4]),  Prem Watsa of Fairfax (FRFHF[5]) and Wilbur Ross all increased their stake in the oil and gas company.

The stock is around $5 and change, but management turned down a buyout offer a few years ago at around $20 a share as too low. XCO stock pays a decent dividend, and the shares are yielding 3.91%, so I’m getting paid to wait for the eventual payoff in the shares.

If I was much younger man, longshots and turnarounds would be a much bigger part of my investing activities. Even now I like to keep a percentage of my portfolio in these hero-or-zero stocks. Although volatile and higher risk, the payoffs usually more than compensate for the risks.

As of this writing, Tim Melvin was long AT and XCO.

  1. [Image]: https://investorplace.com/wp-content/uploads/2010/12/arrows.gif
  2. AT: http://studio-5.financialcontent.com/investplace/quote?Symbol=AT
  3. XCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=XCO
  4. OAK: http://studio-5.financialcontent.com/investplace/quote?Symbol=OAK
  5. FRFHF: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRFHF

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