It’s the nature of big money to flow from one asset class to another. Similarly, within equities, funds flow from overvalued or overbought stocks to underperforming stocks. Of course, there has to be a fundamental factor that backs the reversal.
It’s also worth noting that the S&P 500 Index trades at a cyclically adjusted price-to-earnings-ratio of 37.98. Market valuations seem stretched and factors like inflation and timing of a rate hike can result in a sharp correction. In such a scenario, underperforming stocks are likely to remain relatively resilient.
This column will talk about four underperforming stocks that have strong fundamentals. Additionally, business development has been positive and markets are likely to see value in these names.
Let’s look at the factors that can translate into a sharp reversal for these underperforming stocks.
Underperforming Stocks: Netflix (NFLX)
NFLX stock has remained sideways for almost 12-months now. The stock seems to have strong support around $500 levels and I believe an upside is imminent. With the rise in cases related to the delta variant, another lockdown might be on the cards. As the need for at-home entertainment sustains, Netflix is likely to do well.
It’s worth noting that for the second quarter of 2021, Netflix reported healthy 19.4% revenue growth to $7.3 billion. For the same period, the company’s global paid membership increased to 209.8 million viewers. However, net addition to paid membership was sluggish at 1.54 million. This is likely to change in the coming quarter with net additions guided at 3.5 million.
An important point to note is that besides membership growth, the average revenue per member increased by 8%. With this trend, the company’s expects growth in operating margin as compared to the prior year.
The Covid-19 pandemic has also caused production delays. Ultimately, membership growth depends on original content creation. As more content is delivered in the coming quarters, membership growth can potentially accelerate.
Overall, Netflix has a strong global presence with quality content. NFLX stock has remained resilient and it seems that a strong upside is due after an extended consolidation.
Alibaba Group (BABA)
Shares of Alibaba have been among the top underperforming stocks in the last few quarters. Regulatory headwinds have ensured that the stock continues to trend lower. However, it seems that BABA stock is undervalued and a strong reversal is due.
In a recent letter to clients, Miller Value Partners opined that Alibaba has “already been fined and agreed to changes in how it operates.” Miller also noted that “concerns have depressed expectations creating a divergence between those and what we believe are very strong fundamentals.”
In terms of those fundamentals, Alibaba continues to report strong numbers. In the most recent quarter, the company reported healthy growth in the core commerce segment. The segment has witnessed sustained growth with the Southeast Asian markets being a key growth driver. The core commerce segment also remains the cash cow for Alibaba.
Furthermore, growth in the cloud business has sustained. The segment has also reported two consecutive quarters of positive EBITDA. Over the next five years, the cloud business is likely to be another free cash flow driver for the company.
For the June quarter, Alibaba reported free cash flow of $3.2 billion. FCF was reduced by an anti-monopoly fine of $1.4 billion. The key point to note is that Alibaba has ample financial flexibility to pursue aggressive organic growth and acquisitions.
Underperforming Stocks: Barrick Gold (GOLD)
The price of gold might be off its highs but shares of Barrick Gold have been among the mining sector’s most underperforming stocks. In particular, as compared to the likes of Newmont Corporation (NYSE:NEM), it’s fallen short. After trending lower by 25% in the last 12 months, GOLD stock now seems attractively valued.
For Q2 2021, Barrick reported production of 1,041K oz. For the same period, the company reported an all-in-sustaining-cost of $1,087 an ounce. Therefore, even if gold is in the range of $1,800 to $2,000 an ounce, the company is positioned to deliver healthy cash flows.
For the first half of 2021, Barrick Gold reported free cash flow of $744 million. I believe that gold is unlikely to trend lower. Even with the possibility of a rate hike, real interest rates will remain negative for an extended period. This will support precious metals like gold and silver. It’s therefore likely that dividends will sustain and possibly increase in the coming years.
Another important point to note is that the company has a stable production outlook over the next decade. With a cash buffer of more than $5.0 billion, the company is positioned for sustained cash flows. Further, there is ample financial flexibility to pursue acquisition of assets.
AstraZeneca (AZN)
AZN stock has been sideways for the last 12-months. However, there are several positive factors that can translate into a sharp reversal for the AstraZeneca shares.
For the first half of 2021, AstraZeneca reported revenue growth of 18%, which included a 9% positive impact from the Covid-19 vaccine. New medicines have significantly contributed to the company’s top-line growth. In particular, growth has been robust in the oncology and new CVRM segment.
Furthermore, AstraZeneca has a deep late-stage pipeline of candidates. Currently, the company has 160 projects in the pipeline. This includes 13 new molecular entities in the company’s late-stage pipeline of 22 medicines. This would imply healthy top-line growth in the next few years. Additionally, cash flows are likely to remain robust.
AstraZeneca also has a strong global presence. As the company’s portfolio expands, this is another factor that will drive growth. For Q2 2021, the company reported 21% growth from emerging markets. Excluding China, growth from emerging markets was 36%.
The company has also been generating robust cash flows. For the first half of the year, operating cash flows were $2.8 billion. Strong cash flows provide flexibility to invest in the clinical pipeline and increase dividends.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
