Gencorp Inc (GY), Petroleo Brasileiro Petrobras SA (ADR) (PBR): High-Quality Companies You Should Consider

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I always liked to look for investments that might have huge up-side potential. Of course, this up-side comes at a cost such as political risks or lack of liquidity. Here, I present two very un-covered companies that I have been looking at for very specific reasons, and I which I believe offer limited downside and huge up-side potential. These companies will not be a huge part of my portfolio, but I think they might deserve a bet.

Betting on M&A

Petrobras Argentina SA ADR (NYSE:PZE) most commonly know as PESA, has strong fundamentals, huge potential shale reserves in the Vaca Muerta basin, and trades cheaply. But, most importantly, it’s a perfect M&A candidate. As a matter of fact, the company has recently received a bid (the sum was not disclosed) that was considered too low by its controlling shareholder, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). I think it will not be long until bidders come back with a higher offer.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)

Moreover, the company’s fundamentals are strong. PESA continued to report strong results in the fourth quarter of 2012, on the back of increased revenue in local currency and improved operating margins in the exploration and production (E&P) segment. EBITDA benefited from higher gross profits, mainly driven by the E&P segment, along with sizable reductions in operating expenses resulting from controlled SG&A management and lower exploration expenses. Results comparisons versus the previous year were impacted by substantial non-recurrent expenses undertaken by PESA throughout 2011. As a result, EBITDA in 4Q12 and FY2012 increased substantially by 218% year-over-year (yoy) and 95% yoy, respectively, with marked margin expansions.

As previously mentioned, during April of this year, several newspapers reported that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was studying the possibility of selling 51% of its current stake in PESA (Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) currently owns 67% of PESA) to Oil Combustibles. The deal did not go through, but I am sure we shall see much more activity going forward. After all, PESA trades at 1 time EV/EBITDA and pays a growing 3.7% cash dividend yield. This is just a fraction of the price you need to pay if you want to buy Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The Brazilian oil giant trades at 6 times EV/EBITDAX and, since it’s controlled by the Brazilian government, it has zero chances of becoming an M&A target.

A market leader with huge growth ahead

Gencorp Inc (NYSE:GY) provides missile defense and satellite propulsion systems to clients such as the U.S. Department of Defense and NASA.

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