When markets witness extreme reactions, individual stocks can be overvalued or undervalued. However, in most cases, well-known stocks already have discounted news in the price. That’s the efficient market hypothesis.
Having said that, there are little-known stocks in the universe of stocks that are flying under the radar. With limited investor interest and institutional holding, these little-known stocks are often undervalued. However, when these precious gems are discovered by the markets, the stock price action is stellar.
Of course, these are not blue-chip stocks and hence carry a higher risk. It still makes sense to consider some exposure to these little-known stocks for multibagger returns. This column will discuss three fundamentally strong stocks that can surge when they come to the limelight.
Let’s discuss the reasons to be bullish on these little-known stocks.
Leonardo DRS (DRS)
It’s the likes of Lockheed Martin (NYSE:LMT) that come to mind when we talk about defense stocks. Leonardo DRS (NASDAQ:DRS) is an emerging defense player that’s likely to make it big in the coming years. DRS stock has been higher by almost 40% in the last 12 months, and I expect the uptrend to sustain.
As an overview, the company was formed by the merger of Rada Electronic (an Israel-based defense company) with Leonardo DRS. Rada is a manufacturer of tactical radars, and Leonardo is a supplier of defense electronic products & technologies. The combined entity has an addressable market of more than $20 billion. This provides ample headroom for growth.
From a valuation perspective, DRS stock trades at an attractive forward price-earnings ratio of 21.9. Additionally, the market-capitalization-to-sales ratio of 1.2 is attractive.
It’s also worth noting that for Q2 2022, the combined entity reported a net-debt-to-adjusted EBITDA of 0.7. The financial flexibility is high, and Leonardo is targeting mergers and acquisitions for growth. I see a multibagger in DRS stock with a long-term investment horizon.
Borr Drilling (BORR)
Big energy sector names like Chevron Corporation (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) have been in focus. Warren Buffett initiated a meaningful position in these stocks in 2022. Among significantly small-size companies, Borr Drilling (NYSE:BORR) deserves a look. BORR stock has already grabbed some investor attention and has rallied by 194% in the last 12 months.
However, the stock remains undervalued, and I expect multibagger returns in the next few years. As an overview, Borr Drilling is a provider of offshore drilling services. As oil price remains firm, offshore drilling activity has gained traction, and Borr Drilling will continue to benefit.
For last year, Borr expects to record revenue in the range of $435 to $450 million. Revenue is expected to increase to $760 million (mid-range of guidance) in 2023. This will be associated with significant EBITDA margin expansion as contract day rates trend higher. Therefore, with expectations of strong quarterly numbers, BORR stock is likely to remain bullish.
The order intake for Borr Drilling has also been robust. I expect strong order intake to sustain, and that’s another stock upside catalyst. With visibility for healthy cash flows, Borr will also be positioned to deleverage and pursue fleet expansion.
The pandemic has dented sentiments for the travel and tourism industry. Things have, however, changed with significant pent-up demand for tourism, translating into an upside for stocks in the industry.
Among the hidden gems, MakeMyTrip (NASDAQ:MMYT) stock is worth considering. The stock has trended higher by 27% in the last 12 months but still looks undervalued.
Importantly, the company’s travel and tourism business primarily cater to Indian consumers. This makes MakeMyTrip an attractive long-term investment theme. India has one of the best demographics in the world. Further, with a swelling middle class, the tourism industry growth is at an inflection point. It’s estimated that by 2030, India will have 142 million additional middle-income households.
It’s worth noting that MakeMyTrip was reporting operating-level losses till FY2021. The company has, however, turned profitable at the operating level, and margin expansion seems likely in the coming quarters. This is a key stock upside catalyst. With $466 million in cash, the company is also positioned for organic and acquisition-driven growth.
On the date of publication, Faisal Humayun did not hold (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.
Consumer Discretionary, Defense, Energy, Hotel, Industrial, Natural Gas, Oil, Software, Technology, Travel