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Are These 2 Stocks Poised to Double?

Ben Stadlemann and Benj Gallander are co-publishers of the Contra the Heard investment letter, which strives to find turnaround situations or stocks that are currently unpopular. They believe such stocks have the potential to exceed market returns over the long run, often holding for years while the underlying company gets its act together.

The duo’s returns have been remarkable. The President’s Portfolio was up 49.3% in 2013, crushing the performance of every major index. The long-term performance has been just as impressive, as five-year returns are 33.5% per year and 15-year returns are 18.0% annualized. It seems obvious these guys are onto something.

Here are two companies that “The Contra Guys” have said are poised to deliver huge returns for patient investors.

Reitmans

Shares in struggling women’s fashion retailer Reitmans (TSX: RET.A) performed dismally in 2013, falling 50%. The company’s struggles are almost too lengthy to list. Poor sales forced the closure of more than 50 stores. The company was slow to embrace internet sales. Company buyers struggled with the right mix of clothes for each of its banners. There was great hope for the company’s maternity clothes in Babies-R-Us stores in the U.S., but management pulled the plug after the idea was a total flop.

All these issues ate into profitability, ultimately culminating in a massive cut to the dividend, which dropped from 80 cents annually to 20 cents.

Still, the Contra Guys think there’s plenty to get excited about. Management holds a big ownership position in the stock, and CEO Jeremy Reitman has been with the company for almost 40 years. It’s also invested heavily in online sales and in a new, state of the art inventory system. Recent first-quarter results came in better than analysts’ expectations. The company also has a solid balance sheet, sitting on more than $130 million in cash, and is currently trading below book value.

The Contra Guys bought the stock last month, and have a target price of $16-$18.

BlackBerry

The Contra Guys are believers in BlackBerry’s (TSX: BB)(NASDAQ: BBRY) turnaround story, plunking down cash to buy the company just above $10 per share.

Even though the future looks grim for the beleaguered handset maker, there are indications the company is turning things around. The balance sheet is solid, and the company is sitting on more than $2.5 billion in cash. It also announced a recent sale of most of its Canadian real estate, a move that could net the company more than $1 billion. Just these two assets alone make up three quarters of BlackBerry’s $4.5 billion market cap.

There’s little doubt the company’s handset business looks grim. Consumers are overwhelmingly choosing devices made by Apple and Samsung. The Z10 model, which was supposed to be the company’s best attempt to compete with its larger rivals, flopped. But new CEO John Chen has learned from these mistakes, and is currently focusing on two areas where the company has strength — phones with physical keyboards and the developing world.

The company is also making inroads into other areas. It was recently selected to replace Microsoft as the manufacturer of the in-dash entertainment system built into all Ford vehicles. There’s also value in BlackBerry Messenger (BBM), the company’s private messaging service. While nobody is going to argue BBM is worth anything near the $19 billion Facebook paid for WhatsApp, BBM is still worth something.

There’s also the patents BlackBerry purchased from the corpse of Nortel Networks. Those are currently valued on the balance sheet at $1.4 billion.

Once you add up all these factors, the Contra Guys believe BlackBerry’s upside is far higher than the current $8.65 share price.

Foolish bottom line

It’s difficult to invest like the Contra Guys. They are looking at companies that are plagued with problems. Investor sentiment for these companies is very low. But for investors that are willing to look past short-term problems, the long-term profits are often worth the wait.

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Fool contributor Nelson Smith has positions in Reitmans and BlackBerry. David Gardner owns shares of Apple, Facebook, and Ford. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of Apple, Facebook, Ford, and Microsoft.

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