Want to buy SPDR S&P 500 (SPY, Financial)? You’re better off torching your cash instead. At least you’ll get a viral instagram video out of it.
The largest 500 stocks have been uptrending for the last eight years and have little room left to go.
Valuations are expensive. The Standard & Poor's 500 has a price-earnings (P/E) of 25.39 – official nose-bleed territory.
At these levels, we have no interest in following the herd into a market top.
Our strategy has instead been to search for cheap stocks in hated sectors that can pay optionlike returns. We call these “explosive stocks” because of their incredible potential. It’s not uncommon for them to double, triple or even 10x within a year’s time.
These explosive stock opportunities have recently been concentrated in the commodities/resource sector of the market.
Commodities have been in a brutal bear market since 2008, causing many stocks to trade for a fraction of what they once did.
Below are our top explosive stock candidates for 2017. All of these have a chance of ending the year with triple-digit percentage gains.
Intrepid Potash
Intrepid Potash (IPI, Financial) is the only U.S. producer of potash and supplies approximately 10% of American annual consumption.
The agriculture space as a whole has been crushed over the last few years. It was plagued with overproduction and compressed margins. With so much supply it was impossible to turn a profit, but this has slowly been changing with capacity coming off the market and soft commodity prices starting to turn.
When trading cyclic commodity stocks like Intrepid Potash, the key is to focus on capacity shifts and not earnings. Earnings will always follow the turns in capacity, and the stock price will lead earnings. You want to get in before the earnings have recovered but after the washout has run its course. This situation is showing up in Intrepid Potash.
Intrepid Potash’s stock price has stabilized and formed a nice technical base of support. If the reflation theme in the agricultural space plays out, Intrepid Potash could see $6 before the end of the year.
Dorian LPG
Dorian LPG (LPG, Financial) is a liquefied petroleum gas shipping company that owns and operates 22 VLGCs (very large gas carriers). This is another sentiment turnaround play but this time on a company with hard assets, which is another factor we’re looking for as we move into an inflationary environment.
Dorian LPG is run by one of the best in the business, John Hadjipateras. He’s a fifth-generation shipper and knows the space better than anybody. He and the rest of the executive management team started loading up on shares in 2016 during the technical basing pattern. Large relative insider buying is always a good sign when a stock is trading at depressed prices.
The company’s fundamentals are great as well. Revenue and earnings have been steadily growing without an increasing debt load. Long-term debt is only three times average net income.
With a TTM P/E ratio of 8.823, and a shipping market turnaround under way, Dorian LPG makes an excellent value play that should quickly generate triple-digit returns.
Whiting Pete Corp.
Whiting Pete Corp. (WLL, Financial) is an oil and gas exploration and production company that operates in the Rocky Mountains and Permian Basin. This is a well-run E&P company sitting on prime energy real estate. With the new Trump administration and its promises to roll back regulation –Â specifically the environmental sort –Â we should see a sharp continuation in the energy stock recovery theme. One potential risk to this thesis is the dollar bull market. Should the dollar continue to move higher from here, the rise in oil prices is liable to reverse and damage this stock’s prospects.
Cameco
The uranium sector looks a lot like the agricultural sector. Years of brutal downtrending action following the Fukushima disaster has made uranium one of the most hated areas of the market. But sentiment has finally started to change as investors notice huge opportunity in a reflated uranium market.
More than a dozen countries get over a quarter of their energy from nuclear. There are approximately 440 nuclear reactors functioning around the globe. In addition, 73 more are under construction, 168 are being planned, and over 300 are being proposed.
China and India are the biggest drivers of the renewed push into nuclear. China has 20 reactors under construction and over 115 planned. India has pledged to increase its nuclear capacity by 10 times over the next 12 years.
Even the U.S. is set to return to nuclear energy with the incoming administration speaking in favor of increasing its reliance on nuclear.
Cameco (CCJ, Financial) is the “blue chip” uranium player. The company explores, mines, mills, buys and sells uranium concentrate. It also operates four nuclear reactors. Revenue growth is positive again, up 3.5% from last year. Earnings have re-entered positive territory as well. A return to pre-Fukushima prices would be a triple-digit percentage gain for the stock from current levels.
Uranium Resources
Uranium Resources Inc. (URRE, Financial) is a perfect example of what a “cheap option stock” looks like. Instead of buying expiring call options on the actual commodity ETF, you can load up on this speculative miner that will explode if uranium reaches a price that makes mining profitable again. There’s a lot of risk, but if you treat it like an option premium and size accordingly, the play is incredibly attractive given that this stock can 10x if the bull scenario plays out.
Uranium Resources posses ISR facilities which allow it to benefit from a lower break-even cost model. ISR (in-situ recovery) facilities allow miners to extract uranium from low-grade ores where other mining and milling methods may be too expensive.
In Texas, Uranium Resources has two licensed and currently idled processing facilities and approximately 11,000 acres of prospective ISR uranium projects. In New Mexico, Uranium Resources controls mineral rights encompassing approximately 186,000 acres of the prolific Grants Mineral Belt, one of the largest concentrations of sandstone-hosted uranium deposits in the world. All this company needs is for uranium to continue its rally to a point that makes running these idle facilities profitable again. The stock will go bananas.
Century Aluminum
Aluminum has a similar story to potash. Oversupply and overcapacity have led to a long-term bear market. This glut has mostly been the fault of the Chinese government which used its state-directed financial system to expand and maintain millions of tons of uneconomic aluminum smelting capacity. Market-oriented producers have had a hard time maintaining profitability in this environment. Some have even been forced to shut down as China continues to pump state support into an already bloated industry.
This trend ends now that Donald Trump is president. Trump has been extremely vocal about restoring trade balance and making the global marketplace fair for American producers. His entire campaign was run on the promise of returning jobs to the American people. To facilitate his new policies, he recently announced the creation of a National Trade Council inside the White House. He then named an ardent skeptic of trade with China, economist Peter Navarro, to head it.
A general reflation in commodity prices coupled with Trump’s protectionist efforts makes Century Aluminum (CENX, Financial) extremely attractive. There currently only five aluminum smelters operating in the U.S. This is down from 23 in 2000. The industry has completed a sufficient washout, setting the stage for survivors like Century Aluminum to rebound big time as the cycle turns.
Each of the explosive stocks above have potential to deliver incredible gains in 2017. All of them reside within hated areas of the market that are now seeing sentiment change due to the return of inflation and a brand-new Trump administration. Remember, these stocks are highly volatile so the key is to only buy as much as you’re willing to lose. Treat them like options.
Disclosure: The author owns no shares in any stocks mentioned in this article.
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