2 Stocks Under $3 That Could Rise Over 65% in the Next 18 Months

Western Forest Products Inc. (TSX:WEF) and Lake Shore Gold Corp. (TSX:LSG), could each return more than 65% by the conclusion of fiscal 2016. Should you speculate on one of them?

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Amateur investors think that stocks trading under $3 are bargains, but Foolish investors know that this is not the case. Oftentimes, a stock falls below $3 because of a weak financial performance by the company, because it has flooded the market with too many of its shares, or because of legal or accounting issues.

To find a true bargain under $3, you need to look for companies that remain profitable and whose stock trades at inexpensive valuations compared with their five-year averages. I have scoured the market and found two stocks from two different industries that meet these criteria, so let’s take a look at each companies’ first-quarter earnings results and their stocks’ valuations to determine if you should speculate on one of them today.

1. Western Forest Products Inc.

Western Forest Products Inc. (TSX:WEF) is one of the largest manufacturers of high-quality wood products in Canada.

In the first quarter of fiscal 2015 its net income from continuing operations decreased 21.6% to $18.5 million, its earnings per share from continuing operations decreased 16.7% to $0.05, and its revenue increased 1.1% to $248.6 million compared with the year-ago period.

At today’s levels, Western Forest’s stock trades at 11.5 times fiscal 2015’s estimated earnings per share of $0.19 and seven times fiscal 2016’s estimated earnings per share of $0.31, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 15 and the industry average multiple of 19.

I think the company’s stock could consistently trade at a fair multiple of at least 15, which would place its shares around $2.85 by the conclusion of fiscal 2015 and around $4.65 by the conclusion of fiscal 2016, representing upside of more than 30% and 113%, respectively, from current levels.

In addition, Western Forest pays a quarterly dividend of $0.02 per share, or $0.08 per share annually, giving its stock a 3.7% yield at today’s levels.

2. Lake Shore Gold Corp.

Lake Shore Gold Corp. (TSX:LSG) is a gold producer with operations in the Timmins West and Bell Creek mines in Ontario, Canada.

In the first quarter of fiscal 2015, its net income increased 163.1% to $12.07 million, its earnings per share increased 200% to $0.03, and its revenue increased 28.7% to $79.12 million compared with the year-ago period.

At current levels, Lake Shore’s stock trades at 19.8 times fiscal 2015’s estimated earnings per share of $0.06 and 14.9 times fiscal 2016’s estimated earnings per share of $0.08, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 1,719.7 and the industry average multiple of 21.3.

I think the company’s stock could consistently command a fair multiple of at least 25, which would place its shares around $1.50 by the conclusion of fiscal 2015 and around $2.00 by the conclusion of fiscal 2016, representing upside of more than 26% and 68%, respectively, from today’s levels.

Would your portfolio benefit from a little speculation?

Western Forest Products and Lake Shore Gold are two of the top stocks trading under $3 in the market today. If your portfolio could use a speculative stock, take a closer look and strongly consider buying one of them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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