Now that the baseball season is over, I spent some time last weekend looking over historical baseball statistics. One list of stats had some amazing names on it. The all-time leaders in this class included names like Ken Griffey Jr., Reggie Jackson, Mickey Mantle, Willie Stargell and Mike Schmidt. While that is a list of great power hitters, what I was actually looking at is a list of the all-time strikeout leaders.
Yes, that’s right — the guys who hit the most home runs are also the ones who swing and miss the most often. However, when they did connect, they hit it out of the park. As Earl Weaver once said, one of the keys to being a winning ball club is the three-run homer.
A Baseball Lesson for Investors
We can apply the three-run homer approach to success in investing as well as baseball. Here’s the basic idea: You should devote some small portion of your portfolio to stocks that have the potential to double, triple or quadruple your money over the next few years. If I were younger, these stocks would make up about half of my portfolio, but today I have much smaller percentage of my assets in these risky, but potentially high-reward stocks. Even with a reduced allocation, my home run portfolio is still the one that is the most fun to watch. And when one works, it adds a nice boost to my overall return.
To keep my batting average as high as possible, I limit my efforts to beaten down stocks that have been vetted by an outside research service and have a strong possibility for recovery. One of my favorite ways to search for these names is to identify stocks with single digit prices that earn a 4 or 5 star ranking from S&P Capital IQ. This generally produces a list of low-priced stocks that have the potential for huge returns.
Scoring in the Trash Business
Casella Waste Systems Inc. (CWST) is a great example of a potential home run stock. The company is in the trash business and serves residential, commercial and industrial companies in the Northeast. It has 35 solid waste collection operations, 42 transfer stations, 16 recycling facilities, nine Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition materials. The company is seeing volume pick up along with the economy. Plus, a lot of landfills in the Northeast have closed or are schedule to be closed soon. That will improve pricing for Casella’s landfills in the region.
Casella Waste, now trading at $4.20 a share, has strengthened its balance sheet over the past few years by selling non-core assets and reducing its debt load. The company is still highly leveraged, but it is in compliance with all its debt covenants and has no significant debt maturing until March of 2016. In the near-term, there are no liquidity issues.
If management is able to successfully execute its long-term plans, I can see CWST stock doubling in the next few years. If the economy begins to pick up speed, Casella could get back to the mid-teens where it traded pre-recession. If events don’t work in Casella’s favor, the stock might drop back down near the all-time lows of about $2. That’s a favorable risk-reward ratio at today prices.
Diversification is Key
Do you run out and put your whole portfolio in a stock like Casella Waste? Of course not. The secret to the long ball approach is to have a diversified mix of small positions in these potential moonshot stocks.
In my experience, if you are right more than about a third of the time you end up generating solid long-term returns. If you get on a run where you bat .500 for a period of time, you generate returns that are nothing short of spectacular.
As of this writing, Tim Melvin was long CWST.
