Finding a stock with the potential to double is a tall order. The company needs to have a solid business model, promising growth prospects and strong fundamentals. Companies like LinkedIn Corp (NYSE:LNKD), Rite Aid Corporation (NYSE:RAD), and Winnebago Industries, Inc. (NYSE:WGO) have strong macroeconomic fundamentals and can boast stock gains of more than 100% and earnings growth of 30% or more this year.
But these stocks have made their move already. How do we find the next breakout stock? One way is to look for companies with a similar combination of solid fundamentals and strong earnings growth.
FutureFuel Corp. (NYSE:FF) has enjoyed tremendous earnings growth: 26% over the past five years and 110% growth in earnings per share (EPS) for the same quarter versus last year. In addition, the company beat expectations by 78% in this year’s first quarter and 55% in the second, which certainly qualifies as solid growth. It has enough cash on hand to meet current liabilities and pay a dividend of 2.7%.
FutureFuel Corp. (NYSE:FF)’s business model also looks solid. The company has two divisions: biofuels, which creates cellulosic ethanol that primarily serves the biodiesel market, and chemicals, which makes performance and custom chemicals for third-party clients. FutureFuel Corp. (NYSE:FF)’s annual biodiesel capacity of 59 million gallons represents a 70% increase since 2011, and the company has posted profit margins of more than 15% for the past three years — including an 80% increase in gross profits, to $49 million, in the first half of this year from the same period last year.
The current social and political climate has been a windfall for alternative energy. The Environmental Protection Agency has mandated that a higher cellulosic ethanol blend be used in gasoline mixes. Although Big Oil has had some success in fighting and influencing the new standard, it seems inevitable that more biofuel will be in increasing demand for the foreseeable future.
Competitors like Renewable Energy Group Inc (NASDAQ:REGI) and Archer Daniels Midland Company (NYSE:ADM) are poised to profit from the same macroeconomic factors as FutureFuel but haven’t had the same tremendous growth. FutureFuel also offers a higher dividend than either Archer Daniels Midland Company (NYSE:ADM), which pays 2%, or Renewable Energy Group Inc (NASDAQ:REGI), which doesn’t pay one at all.
FutureFuel Corp. (NYSE:FF) carries no long-term debt, giving it an appealing long-term debt-to-equity ratio of zero. The cash ratio (cash and equivalents divided by current liabilities), the most stringent of the liquidity ratios, comes out to 3.9, a staggering figure that tells us the company has enough cash and short-term investments to pay its current liabilities in full if needed.
Despite an upward EPS revision in the past 30 days from $1.10 to $1.34 — an increase of 21.8% — FF is only up 5.8%. This price disparity suggests that the full potential in FutureFuel Corp. (NYSE:FF) has not been recognized by Wall Street, keeping the stock at a discounted value. Momentum in the stock should keep the uptrend going as the 20-day moving average continues to widen the gap from the 50-day average.
Risks to Consider: The biofuel industry is reliant on the continuation of the federal RFS2 mandate, which, while recently renewed, is still subject to political changes. In addition, Future Fuel’s small operations are highly dependent upon tax credits, the loss of which could cause a discontinuation of biodiesel operations.
Action to Take –> Based on FutureFuel’s earnings history and growth expectations, the fair value of the stock should be between $23 and $34, a gain of up to 103%.
P.S. — FutureFuel is far from the only company doing well with alternative fuels. In fact, one tiny company is poised to kill the gasoline engine. Deals are already quietly being made with top automakers. Billions are being invested. For more on how this company could change our way of life — and make you triple-digit gains in the process — click here.
– Daniel Cross
The article Buy This ‘Gasoline Killer’ For A Shot At Triple-Digit Returns originally appeared on StreetAuthority and is written by Daniel Cross.
Daniel Cross does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
