Twenty-Five Companies Whose Price Will Likely Rise in 2017

Every year around this time, the widely read and respected financial blogger Eddy Elfenbein picks twenty stocks whose price he thinks will rise over the next twelve months. He calls this his buy list, and it has a good track record. This month he’s raising his picks to twenty-five.

Well, I think I can beat him next year. Elfenbein is brilliant, with far more experience than I have. But I have a different approach than he does. If I lose, I'll deserve the copious egg on my face. If I win, though, it could just be that a systematic approach based on solid accounting principles and assiduous backtesting via Portfolio 123 is superior to a handpicked blue-chip portfolio.

Here are twenty-five stocks that I believe are poised for a good price increase. While Elfenbein picks big companies with strong earnings, I pick tiny companies with weak earnings. (Call me a contrarian.) These are companies that few people invest in. They have very low price-to-sales ratios—with three exceptions, their yearly sales exceed their market capitalization, and in fifteen cases are double. And only eleven out of the twenty-five are actually making money (i.e. have earnings per share greater than zero).

One thing Elfenbein and I have in common is that we like stable companies. When you’re investing in a company for the long haul, you want it to be stable. So I look for companies whose sales, assets, and other accounting metrics haven’t changed much from one year to the next.

Now to be completely honest, I'm not a buy-and-hold investor. I tend to hold stocks for six weeks to six months. I think I can make more money that way. So the strategy I'm using to pick these stocks isn't the same as the one I use for my personal investments. For those, earnings and free cash flow play a large part. To choose these, though, I disregarded everything earnings-related except for earnings growth and almost everything related to free cash flow. Instead I focused on low price, low volume, and accounting stability.

A lot of people are afraid of low-liquidity stocks. Well, the liquidity here isn't that low. All of these have an average daily total (price times volume) traded of at least $50,000 per day over the last sixty trading days. Still, take these two pieces of essential advice. First, if you want to buy any of these stocks, use limit orders. Market orders for low-volume stocks can get filled at high prices. Second, to avoid undue market impact, check the average daily total, and don't invest an amount more than 50% of that. For example, don't invest more than $25,000 or $30,000 in inTest (the stock on this list with the lowest volume) right now.

Here’s the list, in order of confidence. (In other words, I have more confidence that my top ten or fifteen choices will beat Mr. Elfenbein than that my top twenty-five will.)

1. U.S. Auto Parts Network (PRTS). Online retailer of aftermarket auto parts and accessories.
2. MPM Holdings (MPMQ). Aka Momentive. Produces and sells silicones and quartz.
3. Wayside Technology Group (WSTG). New Jersey–based IT solutions company.
4. inTest (INTT). Makes products used in testing integrated circuits.
5. Sterling Construction (STRL). Infrastructure building and repair in the Southwest.
6. Noodles & Co (NDLS). Fast food chain.
7. Christopher & Banks (CBK). Retailer of women’s wear.
8. Celestica (CLS). Canadian supply-chain solutions provider.
9. New York & Co (NWY). Retailer of women’s wear.
10. Bravo Brio Restaurant Group (BBRG). Italian restaurant chain.
11. Hallmark Financial Services (HALL). Texas-based property and casualty insurance company.
12. Crawford & Co (CRD.B). Claims management for insurers and adjusters.
13. Harvard Bioscience (HBIO). Maker and retailer of instruments used in life science research.
14. EXFO (EXFO). Canada-based provider of IT solutions to the telecommunications industry.
15. Points International (PCOM). Canada-based servicer of rewards/loyalty programs worldwide.
16. Shiloh Industries (SHLO). Makes vehicle shocks, supports, housings, and other parts.
17. Radio One (ROIAK). Owns and operates urban/African American radio stations.
18. Neff (NEFF). Construction equipment rental.
19. Security National Financial (SNFCA). Utah-based life insurance/cemetery/mortgage company.
20. Cellcom Israel (CEL). Israel’s largest cellphone company.
21. YuMe (YUME). Digital video advertising solutions.
22. Westmoreland Coal (WLB). Mines coal and sells it to power plants.
23. Syneron Medical (ELOS). Israel-based skin-care medicine maker.
24. SeaSpine Holdings (SPNE). Surgical solutions for spinal disorders.
25. Information Services Group (III). IT advising.

Full disclosure: I own stock in three of these companies: PRTS, INTT, and HBIO.

If anyone out there wants to make a similar list and include it in the comments, we can have a kind of contest . . . Just be sure to comment before January 1, as I'll be using YTD measures like Mr. Elfenbein does.

Oh, and I apologize for taking so long between blog posts. In addition to my day job and the book I've been contracted to write, I have been working for months on a very long post about William F. Sharpe, beta, and the paradox of risk-adjusted returns, and it should be ready quite soon.

My ten largest holdings right now: NTIP, MOCO, SBFG, MCFT, NCT, MFNC, OBCI, INTT, ARCI, ERS.

YTD CAGR: 46%.

Comments

[dave]

Great post. I too like microcaps. I hope you do blog more about these and keep us updated. Why do you only own 3 of the 25? Do you think your list will do 15%+?

[Yuval Taylor]

I do think the stocks on my list will do very well, but I'm not a buy-and-hold-for-a-year investor. My average holding period is about three months. I'm pretty sure I can make more money that way. I doubt I could have made 45% last year if I'd just bought and held the whole year long.