Saturday, June 26, 2010

5 Hail-Mary Stocks

Often, if investors are willing to look long and hard enough, they will uncover stocks with enormous potential at the expense of significant or permanent loss of capital. Since value investors tend to primarily be concerned with avoiding permanent losses of capital, extensive research is required to find stocks that also mitigate potential losses. To a certain extent that may be true. But investing is all about probabilities. If given the opportunity to risk a 50% loss at the possibility of multi-fold gains, it may worthwhile to dig deeper.

Why Do ItAs value investing guru Ben Graham once remarked, "You are neither right nor wrong just because the crowd disagrees with you. You are right because your data and reasoning are right." The same applies whether looking at a blue chip or a new junior company. If your data leads you to believe that a company is actually better than it looks, then yes it makes sense to play the probabilities. As such, investors may wish to spend some due diligence looking at the following names to see if such opportunity exists.

Risky Stocks With Big Possible Payoffs
Jackson Hewitt
 (NYSE:JTX) has been on a long, steady decline for the past few years. Not even the market rally of 2009 could help this stock. Shares, which traded over $17 less than two years ago, have fallen to $1.35 today despite the fact that this company still remains the No.2 tax preparer after H&R Block (NYSE:HRB).  The headwinds this company faces are serious. Industry-wide tax prep volume is falling as more people find using online software like Intuit's (Nasdaq:INTU) Turbo Tax easy and less expensive.
Specific to JTX, it lost more than 50% of its refund anticipation loan (RAL) business this past tax season when one of its partner banks stopped providing the financing. An RAL is essentially the product that allows customers to get their refunds, less a fee, instantly after filing a return. The company is trading as if it had no life left, which is not the case. Management is working to find another partner to fund the RAL business. News of that alone could send shares up by over 50%, but further operational improvement could see shares double or triple. At any rate, it's worth investigating.

Too Good to Be True?TravelCenters of America (NYSE:TA) is a name many are familiar with. Shares have declined again as the broad market has declined. On paper, shares trade for $2.55, while the company has nearly $9 in net cash per share and book value is over $15 a share.  Before the markets crashed, shares traded for over $40. TravelCenters has not been profitable for years and financial assistance from its landlord, Hospitality Properties Trust(NYSE:HPT), has allowed the company to defer its costs. Those costs are recored as liabilities on the balance sheet. Statistically, the company is a bargain, but Mr. Market doesn't care right now and the stock has gone nowhere but down.

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