Sometimes in life we’re forced to do things even though we really want to run away.
For many folks, the fear of doctors and hospitals is so strong that they don’t even want to know what’s ailing them. Many employees want a raise, but lack the courage to go in and explain to the boss why they deserve it, even if their performance has been exemplary. Also, as we all know, mustering up the courage to confess your feelings to a potential date is one of the toughest things we’ll ever do.
And yet, we do these difficult things. It’s not because we’re masochists, but because we know that the long-term gains are worth the short-term pain.
The same thing can apply to investing. Even though we’re all told to buy low and sell high, it’s difficult to even research a company that’s hitting new lows. Nobody has anything good to say about a beaten-up company. Media commentators are either bashing it or ignoring it completely. Being a contrarian is difficult, to say the least.
However, beaten-up stocks offer terrific opportunities for investors to really supercharge their returns. Here are three companies that are experiencing short-term pain, but are set for long-term gains.
1. Penn West Petroleum
The last few years have been pretty brutal for Penn West Petroleum’s (TSX: PWT)(NYSE: PWE) shareholders.
Not only is the share price down considerably — by almost 50% since the end of 2011 — but profits sank so low that the company was forced to slash its dividend in half during the summer of 2013. A multitude of problems plagued the company, including poor operational results and general management ineptitude.
However, things are looking up. The company is currently selling off non-core assets and using the proceeds to pay down its debt, which has fallen by more than 20% over the last year. Cash flow has improved, making its nearly 6% yield safe. Also, senior management has largely been replaced with executives who have had previous success with other players in the patch.
From a price-to-book value perspective, Penn West is perhaps the cheapest name in the sector. It trades at just 66% of its book value. Obviously, the company has work to do to regain investor trust, but investors who get in at these low levels could see huge gains in five years.
Canexus (TSX: CUS) is struggling because it’s suffering from all sorts of cost overruns getting into one of Canada’s biggest growth industries — crude by rail.
The company’s main business is producing chemicals for industries such as pulp and paper and pharmaceuticals, which is a fairly steady business. Where it’s experiencing problems is with its crude-by-rail terminals, which have recently been taken offline for three months to make some needed upgrades. The company doesn’t expect its crude terminals to get to full capacity until sometime in 2015. To make matters worse, the CEO resigned earlier this year.
However, not all is bleak. The company previously announced that up to a third of its 2015 cash flow could come from its oil-by-rail division, after just breaking even in the first quarter of 2014. If it can finally start delivering solid results from that division, investors who bought in today are going to be very happy.
3. Kinross Gold
It appears the worst is over for the beleaguered gold producer. The price of the yellow metal continues to recover, and tensions in the Ukraine have lessened. It continues to bring its cost of production down, and has eked out a small profit over the last two quarters if you don’t count the write-offs.
The company’s balance sheet has improved, and it’s sitting on more than $700 million in cash. If the price of gold continues to recover, look for Kinross to be one of the TSX’s best performers.