Let's get right to it... I want to update you on two of my top stock picks this year -- picks that I think could rise 50% or even 100% over the next few years, even though each is suffering from some major challenges.
I was able to buy these stocks at a cheap price -- precisely because these challenges were in place. Unfortunately, just-released second-quarter results imply that the headwinds in place for these firms are unlikely to resolve in the next few months.
But as we head toward 2013, the picture should significantly brighten for these two, so it would be unwise to sell these stocks now. I strongly believe my patience will be rewarded in the future.
Here's why...
This energy stock proves the cockroach theory
When I added shares of energy drilling services provider Weatherford International (NYSE: WFT) to my portfolio two months ago, I noted that the company was focused on the sweet spot of the drilling market -- artificial lift -- which is a technology that helps aging wells to become newly productive. I also noted that shares were inexpensive due to " the embarrassing news this past winter that it didn't calculate its global tax liabilities accurately." Well, Weatherford has proven the old investing maxim of "The cockroach theory." This means that if one problem becomes visible, then more are likely hidden behind the wall.
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Sure enough, Weatherford just announced that its accounting woes are not winding down, and more accounting mistakes have been uncovered. So the company likely needs another quarter or two to fully tackle the problem and bring its books up to speed. Investors were quite annoyed with the news: many had sensed that Weatherford may have had good news to report on this front. So shares fell $1 on the news (and are now down 9% from the price in which I bought in).
As analysts at UBS noted, "We recognize the new CFO has his hands full cleaning up house and believe it may take longer than originally recognized." Still, there's a reason why UBS has a $24 price target on this stock (representing 100% upside). Merrill Lynch, Goldman Sachs and Citigroup have $18-$19 price targets, implying 50% upside. These analysts know that beyond the accounting issues, Weatherford is very well-positioned in its industry, and that its shares are quite inexpensive.
In a tough economy, it's noteworthy that Weatherford boosted sales 24% from a year ago to $3.8 billion. Operating income rose a healthy 29% to $539 million year-over-year. Make no mistake, were it not for these accounting woes, these shares would likely already be in the upper teens. I still think these accounting-related headwinds will wind up by year's end, and expect shares to make a solid upward move as that time frame approaches.