By Charles Sizemore, Principal of Sizemore Capital
We’re in a bear market.
Yes, I know. The Dow Jones Industrial Average and S&P 500 have yet to fall the full 20% that “officially” defines a bear market. But U.S. small caps and many world markets have been in bear territory for a while, and if you were to strip out the outsize gains of the “FANG” stocks and a handful of other highfliers, the market averages would be across that line as well.
That’s the bad news.
The good news is that bear markets create fantastic opportunities. They reset the clock, take prices back down to bargain levels, and allow investors with idle cash (and strong intestinal fortitude) to make a killing.
Today, we’re going to look at six stocks that, after the beating they’ve taken in this bear mauling, are now priced to triple by the end of the decade. As you might guess, several are in the energy sector, where the selling has been the most aggressive. But there are plenty of opportunities across a few sectors for investors willing to roll the dice.
You should be careful, of course. You don’t get the potential to triple your money unless there are risks involved. But in each of these cases, I consider the risks well worth it.
Kinder Morgan Inc (KMI)
I’ll start with the stock that was almost single-handedly responsible for tanking the midstream master limited partnership market.
I’m talking, of course, about Kinder Morgan Inc (KMI).
Kinder Morgan slashed its dividend late last year, raising fears that it was only the first of many dominoes to fall. And more often than not, a dividend cut is a prelude to major problems. But remember, this is a company that as recently as October was raising its dividend and in fact hiked its dividends four times over the course of 2015. And this is also the same company that was promising double-digit annual dividend growth from now through 2020.
Kinder Morgan’s dividend cut had nothing to do with operational problems and relatively little to do with the price of crude oil. It came down to financing. KMI borrowed heavily in recent years to build out its pipeline empire. All of that borrowing threatened to put Kinder Morgan’s investment-grade rating at risk. So to protect the long-term health of the company, management made the choice to slash the dividend and use the cash to strengthen the balance sheet.
Kinder Morgan’s empire continues to grow, and the dividend will be boosted again … probably within the next couple of years.
Simply returning to its 2015 highs would nearly triple KMI’s price. Add in the modest dividend, and you’re very likely looking at tripling your money in just a few short years.
Energy Transfer Equity LP (ETE)
I actually like the prospects of Kinder Morgan’s midstream rival Energy Transfer Equity LP (ETE) even better.
There is a little more risk in this stock stemming from its controversial merger with fellow midstream titan Williams Companies Inc (WMB). But once again, it comes down to financing. Few question that the merger will make ETE the premier midstream energy company in North America. Once completed, its natural gas pipeline network will be even larger than Kinder Morgan or Enterprise Products Partners L.P. (EPD).
But the fear here is that in the current credit environment, ETE won’t be able to complete the deal without pushing its credit rating deep into junk territory, thus making its ambitious expansion plans prohibitively expensive.
The way I look at it, if worse comes to worst, ETE and the various MLPs under its umbrella, including Energy Transfer Partners LP (ETP), could do what Kinder Morgan did and temporarily reduce their cash payouts until the deal is sealed and cash flowing. I don’t want to see that, mind you. But if that is our worse-case scenario, then it’s something I can accept at current prices.
Because frankly, the share prices would already appear to be discounting a dividend cut. Actually, considering that ETE is down nearly 80% from its 52-week highs, the share price would seem to be discounting major financial distress.
That’s ludicrous. ETE is a premier midstream operator with bond-like cash flows run by one of the smartest men in the business in Kelcy Warren. The stock could triple from current prices and still be below its last year’s all-time highs.
I would be shocked if this company didn’t triple your money by 2020. In fact, I wouldn’t be surprised if it earned six to seven times your money starting at these prices.
Is there risk? Clearly. This stock will continue to be choppy and volatile until the Williams deal is completed, and even then it is likely to be choppy for as long as the market remains on edge about energy prices. But at current prices, these are risks worth taking.
Teekay Corporation (TK)
I’m going to lob one last midstream company your way: seaborne midstream player Teekay Corporation (TK).
Teekay is not technically an MLP. It’s the general partner of two MLPs, Teekay Offshore Partners L.P. (TOO) and Teekay LNG Partners L.P. (TGP). TK has very little in the way of real operations after it made the transition to a pure-play general partner. So, TK is dependent on distributions from its underlying MLPs to fund its own dividend.
And herein lies the problem.
TK was concerned that, in the current credit environment, its MLPs might have a hard time rolling over their debts. So rather than risk a funding crisis down the road, they made the painful (and unexpected for their investors) decision to slash the distributions late last year. Doing so also meant hacking TK’s dividend by about 90% … which sent the stock into a tailspin.
Teekay Corporation is a small-cap stock that is too small for a lot of large institutional investors to buy. And as a result, we have some truly crazy pricing. At one point, TK traded for less than half its tangible book value, implying you could buy up the whole company, sell it for spare parts, and still double your money.
Shares have risen from those depths, but the stock is still very cheap, and we should remember that the dividend cuts are temporary. Once buyers start returning to this stock in earnest, I believe we could make three to five times our money in just a few short years.
Prospect Capital Corporation (PSEC)
The next stock might be a mild stretch, but I would say a tripling by 2020 is still very doable in battered business development company Prospect Capital (PSEC).
If there is a common theme to last year’s ugly market, it is financing. Stocks in sectors that require a lot of debt and equity financing got hit particularly hard. This would include MLPs, real estate investment trusts, mortgage REITs and business development companies like Prospect.
But Prospect has been hit particularly hard due to its external management structure (which many investors say misaligns management incentives and encourages them to pay themselves too much) and lingering bitterness over a dividend cut in late 2014.
Well, the market did what markets do: It overreacted. PSEC now trades for just 60% of its book value. And this is for a stock that has traditionally trading at a decent-sized premium to its book value.
So, let’s play with the math here a little. Returning to book value (or close to it) would mean returns of about 65%. Add in a year’s worth of dividends, and you’re looking at returns of more than 80% in short order.
But remember, we’re talking about tripling before 2020. So tossing in an extra three years’ worth of dividends adds close to 50%. So, that puts us in the ballpark of 130% returns. But if we have any improvement to book value (which is likely between now and then) and the shares return to trading at a slight premium, then we can get awfully close to tripling by 2020.
And I’m pretty sure you won’t be upset if you “only” make two-and-a-half times your money rather than three.
Banco Santander, S.A. (ADR) (SAN)
Moving overseas, let’s take a look at much-abused Spanish banking giant Banco Santander, S.A. (ADR) (SAN).
Not much has gone right for Santander of late. Its home country is having a slow-motion political crisis in which Catalonia is threatening to secede. The euro currency has been dropping like a rock … as have the share prices of financial stocks around world. And as perhaps a final insult to injury, Brazil — one of Santander’s most promising long-term markets — is flirting with a nasty recession and a political crisis of its own.
Not surprisingly, Banco Santander’s shares have taken an absolute beating, and today’s the American-traded shares are actually cheaper than they were during the pits of the 2008 meltdown.
It’s really not hard to triple your money in a stock that’s down more than 80% from its all-time highs.
Let’s play with the numbers. Santander currently trades for about $4.10 per share, or about 62% of book value. That’s cheap even by the standards of a global bank these days. And remember, pre-2008-crisis, it wasn’t unusual for banks to trade for 2 to 3 times book value.
Now, I should be clear that banks are cheaper today for a reason and I don’t see them returning to pre-2008 valuations any time soon. But starting at these prices, they really don’t need to.
Adding in a little help from a stabilizing euro, and SAN should have no problem doubling, tripling or even more between now and 2020.
Valeant Pharmaceuticals Intl Inc (VRX)
And finally, we get to the former darling of the hedge fund world, Valeant Pharmaceuticals Intl Inc (VRX).
Well, a lot has happened since then. Its business practices of raising drug prices came under severe public pressure … and suddenly, overnight, Valeant went from being the stock that could do no wrong to being viewed as the embodiment of evil.
VRX, which was trading at $263 at its highs last year, now trades for just $91.
Getting back to its old highs would come close to tripling your money at these prices. And while I don’t expect that to happen overnight, I should point out that Bill Ackman is still very bullish on the stock, as he explained in his latest letter to investors.
Ackman has made his share of mistakes. He pretty well mutilated J C Penney Company Inc (JCP) a few years ago, and he’s thus far been mostly wrong on his Herbalife Ltd. (HLF) short. But he’s also one of the best managers of his generation, and he generally gets his way.
It’s not hard to see Valeant tripling from these prices.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long EPD, ETE, KMI, PSEC, SAN and TK.