3 Stocks Ready for Large Returns
Investors may want to enhance their chances to realize impressive returns over time by looking for reasonably priced stocks of companies that have strong balance sheets and are expected to achieve significant growth rates in their earnings.
In this search, I looked for stocks that traded below or nearby the Peter Lynch earnings line and whose capital is structured in a way that allows the employment of financial resources in an efficient and effective manner (as measured by return on invested capital (aka ROIC) that surpasses the weighted average cost of capital (aka WACC)).
According to Wall Street analysts' growth estimates, these stocks are also expected to increase their earnings at least as much as the S&P 500 over the next couple of years.
Group 1 Automotive
The first stock to consider is Group 1 Automotive Inc (NYSE:GPI). The share price ($108.62 as of Thursday) trades below the Peter Lynch earnings line, indicating that the stock is reasonably priced.
The stock has a market capitalization of $1.95 billion with a 52-week price range of $59.77 to $110.11
Group 1 Automotive Inc has a return on invested capital of 6.84% versus the weighted average cost of capital of 6.6%. The Houston, Texas-based auto and truck dealership is generating earnings surplus.
Wall Street analysts forecast that the company will grow net earnings by 3.8% in 2020 and by 13.40% in 2021, while the S&P 500 is projected to grow by 1% and 14%, respectively.
The stock has an overweight recommendation rating with an average price target of $118.33.
Dick's Sporting Goods
The second stock to consider is Dick's Sporting Goods Inc (NYSE:DKS). The stock ($43.43 per share at close on Thursday) looks reasonably priced as it trades below the Peter Lynch earnings line.
The stock has a market capitalization of $3.77 billion and a 52-week price range of $31.27 to $49.80.
Amid relevant metrics of financial strength, the return on invested capital of 7.95% exceeds the weighted average cost of capital of 7.88%. The Coraopolis, Pennsylvania-based sporting goods retailer is earning excess returns.
Wall Street analysts estimate Dick's Sporting Goods' net earnings will grow 11.1% this year, 6.4% in 2021 and 8.25% per year over the following five years, while the S&P 500 will increase its earnings by 1%, 14% and 8%, respectively.
Analysts have issued a hold recommendation rating for this stock with an average price target of $49.95 per share.
HNI Corp
The third stock to consider is HNI Corp. (NYSE:HNI). The stock closed at a price of $40.40 per share at close on Thursday. The share price is on par with the Peter Lynch earnings line, signaling that the stock is not expensive.
The market capitalization is $1.72 billion and the 52-week price range is $29.90 to $42.90.
As a sign of financial strength, the Muscatine, Iowa-based manufacturer and seller of office furniture products in North America and internationally yields a 13.98% return on invested capital, which is much higher than the weighted average cost of capital of 7.73%.
Wall Street analysts estimate that HNI Corp. will grow its net earnings by 14.7% this year and by 9% per year over the following five years, while the S&P 500 index will grow its earnings by 14% and 8%, respectively.
As of February, sell-analysts recommend two strong buys and two holds for this stock.
Disclosure: I have no positions in any security mentioned.
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This article first appeared on GuruFocus.
