With the equities sector avoiding a much-dreaded recession in 2023 and subsequently rising to unprecedented heights, investors may be better served rotating into undervalued stocks. Let’s think of it in (American) football terms. If you’re constantly running the ball, it might help to do a play-action pass, just to keep the encroaching defense honest.
And that’s really the underlying motivation behind these contrarian stock picks. You don’t necessarily want to fight the tape. If the market is giving you returns on the usual suspects, by all means, ride that ship. But it still makes sense to at least consider some rotation into less-appreciated securities. That way, if something goes awry, you’re not completely boxed into a corner.
Now, before we dive in, we’ll be looking at various valuation metrics. One particular metric I’d like to draw attention to is the return on invested capital (ROIC). This measures a company’s efficiency in allocating capital to profitable investments. Combing these metrics along with analyst buy ratings should give you a greater chance of long-term success.
On that note, below are undervalued stocks to consider.
VICI Properties (VICI)
Structured as a real estate investment trust (REIT), VICI Properties (NYSE:VICI) at first glance seems risky for undervalued stocks. And to be fair, I’m not going to say that it’s not. In the past 52 weeks, VICI lost more than 6% of its equity value. Further, the questionable economic environment may pose challenges for the business, which involves casino properties.
However, if the Federal Reserve decides to lower interest rates, that could get consumer sentiment moving in the right direction. During the prior hawkish cycle, rising borrowing costs incentivized saving money. Moving forward, if the cycle turns dovish, an incentive to do something with money – including spending it – materializes. That could make VICI a solid idea for contrarian stock picks.
As for the value proposition, VICI trades at a forward earnings multiple of 11.67X, lower than the sector median 15.65X. Also, its ROIC comes in at 8%, above nearly 93% of the competition. With analysts rating shares a consensus strong buy – with a $35.02 average price target – Vici offers an attractive wager.
AGCO (AGCO)
Another risky idea for undervalued stocks, AGCO (NYSE:AGCO) could reward the patient speculator. Per its public profile, Agco is an agricultural machinery manufacturer. On the surface, that doesn’t sound like the most exciting business. Still, the sector deserves far more respect than it gets. After all, we as humans wouldn’t get too far without a robust agricultural ecosystem.
Notably, Mordor Intelligence states that the domestic agricultural machinery market will reach a valuation of $39.56 billion by year’s end. Further, experts project that the segment will expand at a compound annual growth rate (CAGR) of 6.3% by 2029. At the culmination point, the industry may be worth $53.7 billion. Plus, with a rising population consuming more resources, this projection could be understated.
What we do know is that under traditional metrics, AGCO is one of the undervalued stocks. Right now, it trades at 8.71X forward earnings, below the sector median of 10.78X. Also, the company’s ROIC stands at 19.2%, above 88% of its peers. With a strong buy assessment pegged to a $146.71 price target, AGCO is well worth consideration.
LSB Industries (LXU)
As a small-capitalization enterprise, LSB Industries (NYSE:LXU) will require patience. Also, LXU lost almost 11% of equity value in the week ending Jan. 12. So, be prepared for a wild ride. Nevertheless, the positive aspect centers on the relevance of the business. Per LSB’s website, the company is a leading producer of industrial and agricultural chemicals. It’s an important but underappreciated business, making it one of the contrarian stock picks.
According to MarketsandMarkets, the global agrochemicals market reached a valuation of $235.2 billion last year. Further, experts believe that the sector will expand at a CAGR of 3.7% from 2023 to 2028. At the forecast culmination, we could see the space generate revenue of over $282.2 billion. Factor in the industrial chemicals component and LSB enjoys a large total addressable market.
Moreover, the red ink in the charts has led to a deeply undervalued profile. For example, LXU trades at a trailing-year earnings multiple of 6.24X. That’s well below the sector median of 22.92X. And it appears a credible discount given the ROIC of 13%, which is above 82.3% of rivals.
With analysts rating shares a strong buy with an $11.50 price target, LXU is one of the undervalued stocks to watch.
Target Hospitality (TH)
A tricky idea among contrarian stock picks, investors will need guts to acquire Target Hospitality (NASDAQ:TH). Per its public profile, Target provides workforce lodging and other temporary, modular housing. Such structures primarily serve the oil, gas, and mining industries. In addition, Target provides solutions for large-scale events, government agencies, and for disaster relief.
Now, I say it’s a tricky idea for undervalued stocks because of the question marks surrounding oil and gas ecosystem. While major oil-producing nations agreed to production cuts, the action hasn’t really moved the needle for hydrocarbons. Still, if the Fed decides to lower interest rates, this move could devalue the dollar relative to other currencies. Since commodities (including energy resources) are priced in greenbacks, Target could see a cynical bounce higher.
At the moment, few seem to believe in hydrocarbons. As a result, TH trades at a lowly 5.92X trailing-year earnings. Still, the ROIC is impressive, standing at 25.84%, above nearly 90% of its peers. Analysts are looking for a comeback, pegging shares a unanimous strong buy with a $14 average price target.
Cenovus Energy (CVE)
Yet another idea for undervalued stocks that seems a tad too risky, Cenovus Energy (NYSE:CVE) nevertheless has the potential to surprise folks. At first glance, Cenovus seems like trouble. An integrated oil and natural gas giant, the hydrocarbon sector has faced challenges, as stated earlier. As a result, CVE lost more than 19% of equity value in the past 52 weeks.
Still, hydrocarbons – while they face both near term and longer-term headwinds – remain relevant. After all, fossil fuels command high energy density. And a sudden transition to renewables is likely impossible. Even with the positives, bearish traders have decided to sell call options. That seems like a bad setup. However, a positive catalyst could cause a mad dash to cover such short positions.
And it’s not an inconceivable scenario. Currently, CVE trades at only 0.73X trailing-year revenue, despite posting strong long-term sales growth. Investors might also be able to trust the discount given the ROIC of 10.42%, which is above nearly 72% of the sector. Analysts also rate shares a consensus strong buy with a $23.71 target, implying 52% upside.
Alibaba (BABA)
One of the toughest ideas for undervalued stocks due to the underlying risk, Alibaba (NYSE:BABA) is only appropriate for those that can weather a possible storm. Although Alibaba is China’s flagship company, that status right now no longer affords encouragement. According to CNN, the country’s economy struggled last year. Further, the outlook this year isn’t that great based on broader export demand falling.
In turn, that may have significant (read negative) implications for Chinese consumers. That doesn’t exactly bode well for BABA stock, which with the underlying enterprise offering a vast e-commerce network presents a major challenge. That said, exports in December rose 2.3% from the year-ago period, possibly indicating the beginning of a recovery.
Of course, that’s a huge risk to take. Nevertheless, if you do, BABA trades at only 7.12X forward earnings, below the sector median 14.27X. As well, the ROIC comes in at 9.79%, beating out 73.39% of its rivals. Lastly, analysts peg shares a consensus strong buy with a $120.85 average price target, implying over 68% upside.
ZTO Express (ZTO)
Another high-risk, high-reward idea among undervalued stocks, ZTO Express (NYSE:ZTO) isn’t for the faint of heart. In the past 52 weeks, shares lost more than 33% of equity value. Even more problematic, the near-term momentum is discouraging to say the least. It’s only been a few days. Yet since the January opener, ZTO gave up over 9%.
As stated earlier, pressures against the Chinese economy – particularly in exports – cloud ZTO. Per its website, the company is one of the leading express delivery companies in the nation in terms of parcel volume. It needs the economic machinery to pick up. Still, if it does, ZTO could be an attractive idea for extreme contrarian stock picks.
Basically, with the bad news breaking, it’s possible that it’s blue skies moving forward. For those who see the glass half full, ZTO trades at a forward earnings multiple of 11.46X, which runs a bit below the sector median. However, the ROIC clocks in at 11.34%, outpacing 80% of its peers. Finally, analysts rate shares a consensus strong buy with a $33.83 target.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
