Want to see more growth in your portfolio? These three companies have the potential to significantly increase your annual return in the next year.
Gold miners were unloved by the market in 2013 because the commodity was trading at $1,300 an ounce compared to its 2011 high of $1,800. From 2011 to 2013, the market was only seeing the price decline, and investors pushed the value of miners to tremendous lows.
This year miners have managed to control costs and oversupply by cutting their workforce and idling unprofitable mines. The market has reacted positively to these developments by pushing gold stocks higher, but there is still much more potential for additional upside.
The company is trading at just 54% of its tangible book value despite generating positive cash flow every quarter. Historically the price-to-book value of IAMGOLD is at 1.46, giving us a target stock price of $11 — a whopping 275% upside potential.
With central banks keeping interest rates so low for the past five years, inflation will come about sooner or later. When that happens, gold’s attractiveness as a safe haven will return, and companies like IAMGOLD will skyrocket.
2. Pan American Silver
This silver miner has been hit hard in recent years thanks to declining prices for the commodity, but unlike gold, silver also serves in a myriad of industrial uses. The metal is tied to the global economy, and economists are more and more optimistic when it comes to the global recovery. This is good news for Pan American Silver (TSX: PAA)(NASDAQ: PAAS), which is currently trading close to its book value, and nowhere near its historical average of 1.5. The conservative upside potential is over 50%, even after being up 26% year-to-date.
The company’s management is excellent, having handled the cyclical downturn by refusing to cut its dividend while continuing to invest for the long term. Silver’s use is not going anywhere any time soon, and manufacturers will keep on demanding more and more of the metal. Once supply gets tight again, prices will go through the roof and investors who bought in at these low prices will laugh all the way to the bank.
3. Penn West Petroleum
Finally, there is Penn West Petroleum (TSX: PWT)(NYSE: PWE), an exploration and production company of petroleum and natural gas. It’s no secret that North America is in the middle of an energy revolution and is quickly rising through the ranks to become one of the largest producers in the world.
Penn West, like IAMGOLD, is trading for less than its book value. This might sound redundant, but when buying into unloved companies, having a low price-to-book ratio is an important margin of safety. Here again, Penn West Petroleum could easily double in the next 52 weeks thanks to rising crude oil prices, and the surprising resiliency of natural gas prices to stay around the $4 range.
I would not be surprised if Kinder Morgan (NYSE: KMI) or Chevron (NYSE: CVX) decided to acquire Penn West in order to increase their reserves. It’s a lot less risky for a company to have operations in Canada rather than in emerging countries. The company’s reserves are all situated in Canada, which is a very safe country when compared to the rest of the world.
The upside potential for Penn West Petroleum could easily be 40% in the case of an acquisition from a rival or an integrated oil company.
The bottom line
Any of these three companies are candidates for immense upside potential, and this fool is invested in two of them. I have no doubt that both will give me great returns in the coming years, and my margin of safety is large enough to cushion my losses in the event that I am wrong.
Oh, and I am not the only one thinking this way. Many famous hedge fund managers like George Soros, John Paulson, and Steven Cohen are doing the same and investing in both precious metals and energy companies.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor François Denault owns shares of IAMGOLD and Pan American Silver.