I have listed 5 investment ideas poised to post big profits next year. Specifically, these stocks were former high flyers that have fallen back to earth by more than 20% in the last three months. However I recommend investors to look closely as some of these stocks are speculative in nature.
Ford Motor Company (F) – Consumer stocks like Ford have tumbled in this kind of market. The market now seems to have a negative bias towards any company that has an ugly history. Ford has only returned to profitability in fiscal year 2009. This is quite a feat considering the difficult environment that the auto maker operates. Investors are also concerned of the company’s debt. However it is doing its best to reduce its debt. Standard & Poor’s has an imprimatur. It raised the company’s debt to BB+ and removed it from credit watch.
These positive developments have not been reflected in the price. Shares have declined by 25% for the year. This implies a forward price earnings ratio of 7.10 times. This is cheap as the stock has traded between 10 to 11.60 times earnings for the past 5 years. Its competitors are also trading at higher multiples. For example, Toyota Motor Corp. (TM) is valued at 14.90 times next year’s earnings and Honda Motor Corp. (HMC) trades at 7.78 times earnings. Ford’s valuations imply market’s expectations that it could not sustain its turnaround. This is far from the current situation at the company. It has improved its operations and pricing. The concern is softness in the economy. This also remains an overhang on the stock.
General Motors Co (GM) – Investors have a past memory with General Motors. It successfully emerged from a bankruptcy. The “new” General Motors successfully launch an initial public offering last year. It raised $20.1 billion after pricing the stock at the top of the proposed price range. At present the company trades below the IPO price of $33 per share. There’s a study that proves that buying shares trading below IPO price is a profitable venture. Year to date, the stock has declined by 32%. It has same issues with Ford. Investors remain wary with the profitability of auto makers given the current macroeconomic environment.
The stock currently trades at 4.74 times next year’s earnings. This is lower than other auto makers’ earnings multiples. Nearest competitor Ford Motor Co. (F) has price earnings ratio of 7.10 times. Other auto makers like Toyota Motors (TM) trades at 14.90 times earnings and Honda Motor Corp. (HMC) is valued at 7.78 times earnings. It has also returned to profitability like Ford. It’s super cheap that half of its market cap of $38 billion is net cash. Investors are buying an auto maker that generates operating cash flow of $5.8 billion for $18 billion. It sounds like a good deal to me.
ATP Oil & Gas (ATPG) – This highly leveraged stock turns off conservative investors. The market is betting that the stock will run out of cash to finance its capital expenditure and maturing debts. In fact, the market is bearish. The short interest is around 40% of the total float in the market. Credit agency Moody’s sees a restructuring in debt as a possible outcome. Its debt is currently yielding above 20%. This seems like a debt of a company that is going to close shop soon. Meanwhile its shares have fallen by 40%. Its price movement is marked with extreme volatility. The stock has a beta of 2.86.
The current price implies a 17.94 times next year’s earnings. This appears high and optimistic. The company has trailing net loss of $8.67 based on last quarter’s report. Historically the stock has traded as high as 32 times earnings. The current valuation of ATP is higher than its peers. Stone Energy Corp. (SGY) trades at 6.62 times earnings and Carrizo Oil & Gas (CRZO) is valued at 7.14 times earnings. The main risk is oil prices. Declining oil prices will be a disaster for the company. It would mean lower future production and declining cash flows. The stock is an easy pass for risk-averse investors.
GMX Resources Inc. (GMXR) – This is another exploration and production (E&P) oil and gas stock worth a look. Its shares have fallen by 57% for the year. The company’s focus is in the Haynesville shale and Cotton Valley fields. There’s a study that these fields have the lowest drilling costs. Recently it has been moving into Bakken and Niobarara fields. Investors are bearish on the energy sector as a whole. The main risk is that these companies have high capital expenditure requirements and have leverage ratios. If oil prices continue to fall, there is a possibility of liquidity crunch.
For the year, the company has trailing net loss per share of $5.62. Consensus estimates are looking at earnings per share of $0.01 for next year. This is a reversal from this year’s estimated loss per share of $0.13. The problem is that it has huge asset write downs in the past years. However sales have annual growth rate of 38% over the last 5 years. Its competitors in the energy space have double digit earnings multiple. Chesapeake Energy (CHK) is valued at 24 times earnings and Cimarex Energy (XEC) trades at 10 times earnings. The company has normalized earnings per share of $0.60. At 10 times earnings, it could easily double from current price levels.
Quepasa Corp. (QPSA) – This small cap company is an up and coming player in the social networking space. The recent initial public offering of Linkedin Inc. (LNKD) has created a lot of interests in social networking stocks. In fact, Quepasa has traded above $10 a share. When interest in Linkedin shares have faded, the social media stocks followed. Investors realized that these stocks appear to have lofty expectations and are overvalued. Year to date, the stock has declined by 70%.
The company has yet to post substantial profits. It is expected to post $52 million in revenues next year, an increase from this year’s estimated revenues of $8.63 million. Peer companies in the social networking space are valued at around 4 to 20 times revenues. Renren Inc. (RENN) trades at 18 times revenues and Linkedin at 14 times revenues. The risk is that this Latin American social networking has declining page views for the past months. Another risk is the company’s cash burn. Sooner or later it needs to come up profitable or else they need to raise money to finance their operations. I believe Quepasa is a pass for conservative investors but a good speculative stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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