I don’t have a crystal ball, so my estimates here may be well off the mark. Yet I am ready to play the “best guess” game, betting on short-term upside for certain stocks while taking into account the long-term potential of value candidates that could be grossly undervalued at the present time.
Assumptions & Risk
I am working under the assumption that the FTSE 100 will close some 5-10% higher at the end of year — a scenario that is surely possible, at least according to bond market prices worldwide.
So, I am looking for targets that will deliver pre-tax gains of at least 25% in less than four months.
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If Warren Buffett read this article, he’d likely say I am a fool to try and get my Christmas shopping paid by equities!
I wouldn’t blame him, but he’d surely agree with part of my story: the current market weakness presents one of the best opportunities to buy stock since the onset of the credit crunch.
So, the biggest risk here is that you may not be able to cash in by the end of 2015 if you are aiming for a four-month, 20% pre-tax return over the FTSE 100, but remember that at The Motley Fool we recommend to take positions in companies that deliver value over the long term.
Combining these two aspects, I think I have minimised short-term risk. With this in mind, these are the names.
Bombed-Out Stocks Promising 25%+ Returns
The first company that you should keep on the radar is Centrica. Here, I’d bet on a much stronger cash conversion cycle and asset disposals, without ruling out a takeover. A bounce is overdue, based on its assets base and its restructuring plans. In early January, its stock surged 13% in less than two weeks in the wake of the announcement of a new strategy. Only a few pence away from its 52-week low, its stock trades around the lows of 2009. If I am right, you’d be prepared to bet on a price target of 300p.
For similar reasons, I’d choose Tesco in the food retail sector. Elsewhere, I see Brent at between $70 and $80 a barrel by the end of the year, so BP is an obvious choice, while Petrofac also ranks high on my wish list. The riskiest bet of all would be the mining sector, where Antofagasta stands out — I like its fundamentals and its balance sheet.
Forget about all the banks and the insurers, I’d argue — regulatory and headline risks are high, while capital appreciation would take time to show in these sectors now. Be selective, meanwhile, with homebuilders and telecoms companies, where regulatory and headline risks are perceived as being low in spite of relatively high valuations, which is never a nice combination.
