A basic investing rule is to buy when there is fear and sell on greed. It might sound simple, but it’s not uncommon to see investors panic selling and buying during euphoria. Another golden investing rule is to avoid stocks that are hogging the limelight. In general, these stocks are fairly valued or overvalued. Investors need to screen for hidden-gem stocks to buy for multibagger returns.
In a sea of blue-chip and growth stocks, many quality names are ignored. This translates into a valuation gap in these stocks. As money flows from overvalued stocks to these hidden gems, the rally can be meaningful in quick time.
My focus is on hidden-gem stocks to buy with an investment horizon of five years. I believe that these stocks can deliver returns at a CAGR of 50% during this period.
Let’s discuss the reasons that make these stocks to buy attractive at current levels.
Amdocs Limited (DOX)
Amdocs (NASDAQ:DOX) trended higher by 15% in the last 12 months. The stock, however, looks undervalued at a forward price-earnings ratio of 15.6. DOX stock also offers investors an attractive dividend yield of 1.9%, and I expect healthy dividend growth in the coming years.
As an overview, Amdocs provides software and services to the media and communications industry globally. Last year, the company reported $4.58 billion in revenue.
As of Q1 2023, the company reported a record 12-month revenue backlog of $4.1 billion. This provides clear cash flow visibility. For the year, the company expects to deliver a free cash flow of $700 million.
With the monetization of new 5G services and support from new 5G use cases, the company’s growth will likely remain healthy. Another important point is that the company reported 75% recurring revenue in 2022. Recurring revenue will continue to increase as the customer base swells along with service offers. This will help in boosting the EBITDA margin.
The tourism sector was among the worst hit during the pandemic. As the sector makes a comeback, it’s a good time to accumulate some quality stocks. MakeMyTrip (NASDAQ:MMYT) is among the hidden-gem stocks to buy from the sector.
As an overview, MakeMyTrip is an online travel company with India being the focus market. The country has a swelling middle class, and the tourism industry has witnessed healthy growth after the pandemic. To put things into perspective, India will likely have 300 million middle-income households by 2030.
It’s worth noting that MakeMyTrip has reported operating level losses since the financial year 2018. However, the company reported profits last year, and the operating margin improved further in FY2023. With operating leverage, margin improvement is likely to sustain.
MMYT stock has trended higher by 19% in the last 12 months. I believe the best part of the rally will still come in the next few years.
Lithium Americas (LAC)
Lithium Americas (NYSE:LAC) stock is among the top hidden-gem stocks to buy. The valuation points to the fact that the stock has not gotten the attention it deserves.
Currently, the market values the company at $3.1 billion. The company’s Thacker Pass asset has an after-tax net present value of $4.95 billion. Additionally, the Cauchari-Olaroz asset (44.8% stake) in Argentina has a mine life of 40 years and is expected to deliver an average annual EBITDA of $308 million. Clearly, LAC stock is massively undervalued.
It’s worth noting that Lithium Americas has already commenced construction at Thacker Pass. A liquidity infusion of $650 million from General Motors (NYSE:GM) ensures that there are no funding headwinds.
Lithium Americas will also be splitting the company into two entities. Lithium Americas will focus on assets in the United States, and Lithium International will focus on other assets. I expect value unlocking from this split that’s likely in 2023.
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.
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