March Madness is upon us, and nothing makes for a better tournament than when a Cinderella team or two makes it deep in the bracket.
The same goes for beaten-down stocks. After all, what’s better than seeing your portfolio beat the market at the end the year thanks to stocks everyone else gave up on?
But if you thought it was hard to fill out a winning bracket, finding Cinderella stocks to buy isn’t far behind. There’s a reason why stocks hit hard times, be it fundamental weakness, poor sentiment or maybe a secular decline in a company’s business.
Sure, the wisdom of crowds is often wrong — that’s how stocks get mis-priced in the first place — but sometimes it’s spot on. Stocks can be cheap because they’re misunderstood. Just as often, they’re cheap for a reason.
It’s not hard to find seemingly good stocks generating disappointing returns recently. Last year was a wash for equities and so far this year they’re down. When the market is working against you, would-be Cinderella stocks are more likely to turn into pumpkins than year-end winners.
That said, there are a number of out-of-favor names that might just shock the Street this year. The odds are long, but don’t be too surprised if these stocks turn out to be champions this year.
Cinderella Stocks to Buy: Ford Motor Company (F)
Ford Motor (F) keeps printing upbeat news and yet shares are down about 7% for the year-to-date and 20% over the past 52 weeks.
Partly that’s due to weakness in China, Europe and other international markets … but it doesn’t really explain why F is so cheap.
After all, at the same time, Ford is seeing record results in North America, driven by demand for the new aluminum-bodied F-150 pickup truck. That demand helped spark an eight-year high in November sales for F-series trucks.
The market is worried about Ford hurting margins with promotions, as well as the creditworthiness of customers. However, if it can shrug some of that off, look out.
Cinderella Stocks to Buy: Deere & Company (DE)
Deere & Company (DE) is getting hammered by forces well beyond its control, as the global slump in commodity prices is hurting demand for things like tractors and other heavy machinery.
As a result, Deere suffered a terrible 2015 that saw DE shares drop 15%.
Long-term trends of population growth and other factors a great for DE on a fundamental basis, but the short-term is forecast to be one of more pain. Indeed, earnings this year are expected to plunge from $5.77 per share to $4.09 per share.
However, it’s possible that the market has overdone it with the valuation, especially because it has had some time to digest the low estimates.
DE is up 6% this year, and cost cuts and the stirrings of improvement in emerging markets could make DE a darkhorse winner this year.
Cinderella Stocks to Buy: Expedia Inc (EXPE)
Expedia Inc (EXPE) is one of the biggest players in the online travel market, but that’s not as impressive as it sounds.
Heavy competition from Priceline (PCLN) in a highly fragmented industry makes it tough to grab market share, even with expensive acquisitions. With margins under pressure because of global expansion, EXPE is off to a weak start this year.
However, even though EXPE is down 7% YTD, it has been showing strong signs of life.
Indeed, Piper Jaffray recently slapped a call of “overweight” (buy, essentially) on the stock. With a price target of $140 a share, analysts see implied upside of about 20%.
Cinderella Stocks to Buy: Aeropostale Inc (ARO)
Cinderella, the ugly duckling, that troll under the bridge, take your pick: Aeropostale Inc (ARO) has been garbage for some time now.
ARO has tarnished its brand with hopelessly out of fashion stores and apparel. Meanwhile, mall traffic is in decline. There’s a reason why shares have lost nearly 85% of their value in just the past 52 weeks.
And yet there remains the faintest sign of a turnaround taking shape as cost-cutting buys the retailer time.
Aeropostale announced it would be cutting about 100 jobs in a broader cost-cutting effort that should save the company some $35 million to $45 million annually.
True, ARO is up 65% for the year-to-date already, but at about 46 cents a share, it’s still a penny stock. This name is as much of a long shot as any.
General Electric Company: General Electric Company (GE)
General Electric Company (GE) is in the midst of a massive, high-risk transformation that’s going to make a mess of the income statement for a couple years to come.
Jettisoning the financial business to become a pure-play industrial makes a lot of sense, but it’s hard to go forward without GE Capital’s major contributions to revenue and earnings.
Investors also have to look past restructuring charges and all sorts of “adjusted” metrics and results.
Skepticism has GE stock down more than 3% so far this year, but it’s primed for a rebound as the market gains confidence that it can pull this whole thing off.
Not only that, but investors have to at least be getting more comfortable with General Electric’s dividend, which went bye-bye during the financial crisis but has come roaring back in the past few years. GE currently yields 3%, even with the stock at multiyear highs.
Cinderella Stocks to Buy: General Motors Company (GM)
Like Ford, General Motors Company (GM) can’t get no respect.
GM stock is down 9% YTD even as the automaker, again like Ford, generated record sales and profits. Meanwhile, General Motors’ outlook is more than fine, and shares are cheap.
And it’s not just U.S. car sales that are boosting GM results. China might be hurting most multinationals, but it has been a big driver of growth for the automaker.
One persistent worry is that too much industry sales growth is being driven by subprime loans. But if the risks are already factored into GM stock, upside could abound.
GM also has a huge pull in the form of a nearly 5% dividend at current prices.
Cinderella Stocks to Buy: HCP, Inc. (HCP)
HCP, Inc. (HCP) is a real estate investment trust that’s a member of the S&P Dividend Aristocrats. But that doesn’t matter when such a big chunk of its revenue is in trouble.
One knock on HCP is that it has high customer concentration, and the way the stock has been going, it’s a fair criticism. HCP generates about 25% of it revenue from HCR ManorCare and another 10% from Brookdale. Both businesses are struggling, with HCR ManorCare embroiled in a Justice Department investigation, and the latter facing occupancy declines.
Shares are down 16% for the year-to-date, more than swamping any return from the fat 7% dividend yield.
However, HCP still is positioned in the lucrative healthcare market, and it has strong occupancy rates among many of its other tenants. Meanwhile, it’s the only REIT in the S&P 500 Dividend Aristocrats Index, holding a dividend increase streak that it’s unlikely to let slip without a real effort.
If HCP can come back, it will be a Cinderella story for sure.
Cinderella Stocks to Buy: Home Depot Inc (HD)
Home Depot Inc (HD) has been one the best megacap stocks throughout the bull market but it can’t gain traction in 2016. HD stock is down 2%, which actually lags the S&P 500.
It’s hard to see how that lasts long. For all the worries about recession, the evidence is pretty unconvincing, and aside of a slowdown, there’s little reason to worry about HD’s growth.
Unemployment is down, wages are ticking up and the housing market continues to mend.
Moreover, some folks are sprucing up their homes because they can’t move. Others are getting ready to put their homes on the market. Either way, HD benefits.
Cinderella Stocks to Buy: Pfizer Inc. (PFE)
Pfizer Inc. (PFE) is is down 8% so far this year and it’s easy to see how it could stay there.
Revenue growth is hard to come by when sales of blockbuster drugs are in decline and the strong dollar is clipping overseas sales. There’s nothing really compelling going on here.
But PFE does have some very promising drugs in its pipeline. It could also reap the benefits of its recent acquisitions tear sooner than expected. The big windfall could come via its $160 billion merger with Allergan (AGN), and Pfizer went so far as to call the combined pipeline “underappreciated.”
And even if PFE doesn’t have a Cinderella turn this year, the dividend yield of 3.9% makes it a fine long-term equity income play.
Cinderella Stocks to Buy: Wells Fargo & Co (WFC)
Wells Fargo & Co (WFC) has a lot more going for it than against it even though shares have become serious laggards.
The nation’s biggest bank by market cap is off 9% YTD even though the economy appears to be gaining some steam. Banks just can’t catch a break.
The Federal Reserve has begun a rate-hike cycle, and that works both ways for banks. It hurts lending and mortgage underwriting, but it also boosts net interest margins.
If you’re a bull on the economy, you’ve got to like WFC. Rates aren’t going up if the economy doesn’t, and a growing economy is going to take financial stocks along for the ride.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.