These 2 Out-of-Favor Stocks Could Jump at Least 50%

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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 months.

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.

Here's why...

This energy stock proves the cockroach theory

When I added shares of energy drilling services provider Weatherford International ( WFT ) to my portfolio two months ago, I noted that the company was focused on the sweet spot of the drilling market -- 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 accounting 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 in).

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 price target 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 economy , it's noteworthy that Weatherford boosted sales 24% from a year ago to $3.8 billion. Operating income 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 ( F ) 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 North America.

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 net income 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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