In a market obsessed with sexy, fast-growing technology companies, a better long-term strategy may be to look for wallflowers. Wall Street’s rally this year has been led by the tech world’s most storied franchises, including Amazon.com, Apple and Facebook. That has dimmed investors’ interest in many other companies, particularly those that are short on glamour or that face challenges reinvigorating their own growth.
We went looking for stocks that seemed to be cheaper than they deserved, and we came up with eight names. All are relatively depressed, though for different reasons. And for the most part, the companies are attempting to transform themselves in ways that they believe will result in faster growth.
The obvious caveat here is that business transformations don’t always succeed. That can make “cheap” stocks a lot cheaper before they finally hit bottom — or just keep them languishing indefinitely. And even if the turnaround strategies succeed, all of our picks are more likely to offer a get-rich-slowly payoff than overnight riches. That said, here are eight ideas for investors who prefer hunting for value over chasing highfliers.
Although energy stocks have recovered a bit from a nasty 18-month-long slide that started in the middle of 2014, the group remains depressed. And few stocks have been hit harder than Cenovus (symbol CVE, $9.66), which produces oil and gas, mostly in the tar sands of the Canadian province of Alberta. Its U.S.-traded shares have plummeted some 75% from $40 in 2012. Some investors clearly have given up. But for bargain hunters willing to take on high risk, this is a story worth considering.
Cenovus has long been a highly regarded player in the tar sands. Yet as crude prices slid again in March, investors reacted negatively after Cenovus announced plans to buy the tar sands assets of ConocoPhillips (COP) for $13.3 billion (U.S.). The deal, which closed on May 17, doubled Cenovus’s reserves and production, but it also saddled the company with heavy new debt. What’s more, Cenovus issued 208 million new shares to ConocoPhillips, which plans to begin selling them in mid November. Anticipating that selling pressure, the stock has sunk 36% so far in 2017.
Yet the upshot of the ConocoPhillips deal is that it will immediately generate “robust” free cash flow that Cenovus can use to quickly pay down debt, says investment research firm CFRA. (Free cash flow is cash profits after the capital expenditures needed to maintain a business.) What’s more, thanks in part to Cenovus’s “best in class” technology for extracting oil from tar sands, CFRA sees operating earnings rising sharply in 2018, to 45 cents per share (U.S.), from an expected 17 cents per share this year. Of course, another drop in crude prices could dim the outlook for the stock. But the cheaper it gets, the greater the potential reward if Cenovus’s bold move turns out to be as smart as the company has promised.