3 Stocks With Lots of Room to Run

What stocks with lots of room to run are sitting pretty right now? We investigate an Israeli shipping company, a Greek container firm, and a Chinese enterprise specializing in photovoltaic cells.

ZIM Integrated Shipping

Israeli container shipping line ZIM Integrated Shipping (NYSE:ZIM) operates 150 vessels servicing ports around the world. The company controls about 2 percent of the total global container ship fleet and is the 10th largest shipping firm in the world today.

Due to lower shipping rates and rising costs, ZIM is currently seeing its earnings fall rapidly. These pressures, however, are apt to be temporary, and there is a good chance that ZIM will recover when shipping rates and demand rebound.

A discounted cash flow analysis for ZIM suggests that its fair value is around $28.98, suggesting a possible upside of up to 51 percent.

In 2023, ZIM is expected to lose money in the first two quarters before rebounding to a very modest level of profitability in Q3 and Q4. With this rebound, investors are likely to see the stock bounce back to a price that is more reflective of its intrinsic value. A full recovery may take some time, as it will likely be dependent on global macroeconomic conditions.

Investors interested in ZIM should also note the company’s approach to dividends. Unlike many businesses, ZIM chooses to distribute a large percentage of its earnings as dividends that vary from quarter to quarter.

This gives ZIM stock a very high yield during good times, but it also makes it quite unpredictable as an income-generating asset.

In 2022, for instance, ZIM’s quarterly dividends ranged from $2.85 to $6.40. Due to lower expected earnings, dividends in 2023 will almost certainly be far below this range.

Even with earnings expected to be quite slow in the near future, ZIM is priced at an attractive level. With a price-to-cash-flow ratio of just 0.41, the stock offers strong signs of being undervalued. The company’s return on equity of over 85 percent also makes a compelling case for buying the embattled shipping stock.

Although ZIM certainly carries its near-term risks, the company could be a good investment for those who are willing to hold for the long term.

Danaos

Like ZIM, Danaos (NYSE:DAC) is a container shipping company. Based in Greece, Danaos services North America, Europe, Asia and Australia. The company’s fleet is smaller than ZIM’s and comprises 68 vessels.

Danaos appears to have a great deal of room to run from its current price of $57.05. Wall Street analysts target price over next year is $72.50, representing an upside of over 27 percent.

A discounted cash flow analysis, however, implies that even this number could be a low estimate. DCF analysis suggests that the fair value for Danaos is $84.23, more than 45 percent above the current trading price.

This view is supported by the stock’s value metrics. Trading at just 2.28 times forward earnings and 1.17 times sales, there’s a very strong argument to be made that Danaos has been badly oversold by the market. Danaos is also priced at just 1.42 times cash flow, effectively clinching the already solid case for undervaluation.

In contrast to ZIM, Danaos is expected to produce modest earnings growth over the next 12 months. The company’s earnings per share are projected to rise from $25.03 to $25.66, growing about 2.5 percent.

Prospective buyers should note, however, that this growth is not expected to increase in the near future. Over the next five years, the company is expected to average a 3 percent annual growth rate.

Danaos also approaches its dividend much differently than ZIM. While ZIM returns a huge amount of its earnings to investors in the form of irregular and unpredictable distributions, Danaos produces a smaller but more consistent dividend. The stock’s yield is currently 5.26 percent, while the dividend payout ratio is 11 percent.

Each share of Danaos pays $3 annually. Assuming the company’s earnings continue to rise at a modest pace, management appears to have a great deal of room to increase this distribution over the coming years.

Daqo New Energy

Daqo New Energy (NYSE:DQ) is a Chinese company specializing in polysilicon manufacturing for photovoltaic cells.

Due to the increasing demand for solar cells, the global market for polysilicon is expected to grow to over $27 billion by the year 2030. This will likely give polysilicon producers like Daqo a great deal of room for growth for the rest of this decade.

A discounted cash flow analysis of Daqo reveals that the stock’s fair value is approximately $71.51. This is considerably above the median analyst price target of $56. Based on the most recent price of $43.86, the stocks fair DCF value and median target price would allow it to generate returns of 63 percent and 28 percent, respectively.

Despite its strong potential for future growth, Daqo is expected to see its earnings drop over the coming 12 months. Earnings per share over this period are projected to be $12.41, down from $19.28 in the trailing 12-month period.

On the 5-year time horizon, however, analysts expect Daqo to come roaring back with an annualized growth rate of nearly 75 percent.

Daqo also has the advantages of excellent profitability and an extremely strong financial position. The company’s net margin is slightly over 40 percent, while its return on equity is nearly 35 percent. Daqo has no long-term debt and a cash reserve that is more than sufficient to cover its short-term obligations.

One risk investors should consider before investing in Daqo, though, is the potential effect of geopolitical issues on the stock. In 2021, the United States banned imports of polysilicon from one of Daqo’s competitors, Hoshine Silicon Industry Company. The ban was in response to allegations of human rights abuses in the polysilicon supply chain in China’s Xinjiang province.

While there have been no moves to target Daqo, further strain in relations between China and the United States could involve shareholders in risks that do not reflect the fundamentals of the company.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.