Let's get right to it... I want to update you on two of my top
stock picks this year -- picks that I think could rise 50% or even
100% over the next few years, even though each is suffering from
some major challenges.
I was able to buy these stocks at a cheap price -- precisely
because these challenges were in place. Unfortunately,
just-released second-quarter results imply that the headwinds in
place for these firms are unlikely to resolve in the next few
But as we head toward 2013, the picture should significantly
brighten for these two, so it would be unwise to sell these stocks
now. I strongly believe my patience will be rewarded in the future.
This energy stock proves the
When I added
of energy drilling services provider
Weatherford International (
to my portfolio two months ago, I noted that the company was
focused on the sweet
of the drilling
-- artificial lift -- which is a technology that helps aging wells
to become newly productive. I also noted that shares were
inexpensive due to " the embarrassing news this past winter that it
didn't calculate its global tax liabilities accurately." Well,
Weatherford has proven the old investing maxim of "The cockroach
theory." This means that if one problem becomes visible, then more
are likely hidden behind the wall.
Sure enough, Weatherford just announced that its
woes are not winding down, and more accounting mistakes have been
uncovered. So the company likely needs another quarter or two to
fully tackle the problem and bring its books up to speed. Investors
were quite annoyed with the news: many had sensed that Weatherford
may have had good news to report on this front. So shares fell $1
on the news (and are now down 9% from the price in which I bought
As analysts at UBS noted, "We recognize the new CFO has his hands
full cleaning up house and believe it may take longer than
originally recognized." Still, there's a reason why UBS has a $24
on this stock (representing 100% upside). Merrill Lynch, Goldman
Sachs and Citigroup have $18-$19 price targets, implying 50%
upside. These analysts know that beyond the accounting issues,
Weatherford is very well-positioned in its industry, and that its
shares are quite inexpensive.
In a tough
, it's noteworthy that Weatherford boosted sales 24% from a year
ago to $3.8 billion.
rose a healthy 29% to $539 million year-over-year. Make no mistake,
were it not for these accounting woes, these shares would likely
already be in the upper teens. I still think these
accounting-related headwinds will wind up by year's end, and expect
shares to make a solid upward move as that time frame approaches.
Ford's global woes
Ford Motor (
also delivered second-quarter results on Wednesday, July 25, that
had plenty of noise. As I've noted before, Ford's European
operations are slumping badly as consumers hold off on making
discretionary purchases like new cars. It's an irony that this bad
news is obscuring a remarkably robust set of results coming from
More to the point, it's remarkable how much investors are focusing
on the European drag. Note that Ford earned $2 billion in North
America in the second quarter, compared with a $400 million loss in
Europe. (Ford's Latin American and Asian operations generated a
combined $60 million loss). Add it up, and Ford remains solidly
profitable, albeit much less so than if Europe weren't a millstone.
Ford earned about $1 billion in
in the second quarter, though that figure would likely have been
roughly $2 billion if the global economy were healthier.
Yet as is the case with Weatherford, this is a headwind that will
also abate. Ford has been radically cutting costs in Europe and
should crawl back to at least break-even in early 2013.
Longer-term, Europe should still represent a robust base for
profits. That's because European consumers have now been deferring
auto purchases for nearly half a decade. If history is any guide,
then a little improvement in consumer confidence should help
unleash all of the pent up demand that exists.
Few are talking about that right now, with the European crisis
dragging out, but it's unwise to simply write Europe off for many
years to come. My best guess: car sales pick up a bit in 2013, and
at a sharp pace into 2014 and 2015. At some point, perhaps in the
next quarter or two, investors will likely start focusing on the
bottoming out and rebound phase to come for European auto sales.
And that's why it's unwise to dump this stock now.
Risks to Consider:
For Weatherford, energy prices need to stay aloft for demand to
stay robust. A drop in energy prices could add more pressure to
shares. For Ford, any slowdown in U.S. auto sales would put this
stock out of favor for a longer time frame.
Action to Take -->
My investment approach, by definition, seeks out "stocks with
warts." This is the only way to own great companies -- when they
are selling at a sharp discount to their long-term growth
prospects. It also means that you have to put up with the stresses
in the near-term, before the long-term potential can be realized.
Ford and Weatherford each looks poised for major gains -- for
patient investors like me.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of WFT, F in one or more if its "real money" portfolios.