Today we dive deeper than the headlines to uncover overlooked stocks. In the artificial intelligence (AI) market of 2024, tech giants dominated the first quarter. Yet, savvy investors are now looking for undervalued companies with breakout potential. The S&P 500 and Nasdaq 100 have seen respectable gains of over 7% year to date (YTD).
However, a number of prominent growth stocks are showing signs of cooling off. Thus, the decline in their stock prices could be a prime opportunity for a market rotation towards more affordable options.
Enter – overlooked stocks. These under-the-radar companies often boast strong fundamentals, favorable valuations and promising growth trajectories. They offer the potential for significant upside with reduced downside risk, making them ideal for investors seeking diversification to unlock hidden gems.
Ready to freshen up your portfolio before the market catches on? Let’s delve into three such overlooked stocks.
Alliance Resource Partners (ARLP)
As a leading coal producer stateside, Alliance Resource Partners (NASDAQ:ARLP) tops our list of overlooked stocks. ARLP presents a value proposition for investors seeking a combination of attractive valuation, strong fundamentals and an attractive dividend yield. However, a significant caveat exists. Recognizing the headwinds in the coal sector, the company is strategically transitioning its business model.
Alliance Resource’s fourth quarter results reflect the challenges of the coal industry. Revenue declined 11% year over year (YOY) to $625 million due to lower coal prices and reduced sales volumes. These factors, coupled with higher operating expenses, led to a 46% reduction in net income to $115 million.
In light of a tough regulatory environment and declining coal prices, management is transitioning from coal production to the Oil & Gas royalty business. Now, ARLP seeks new investments in undeveloped oil and gas fields to grow its portfolio of royalty-generating assets. In other words, the shift in its business model represents a radical transition from a low-margin sector to a high-margin opportunity.
Further, the stock has declined 4% YTD, while the diviend yield is over 13%. Shares remain undervalued at 5.0 times forward earnings and 1.0 times trailing sales. Analysts have a 12-month price target of $26.00 for ARLP, suggesting potential upside of 28% from current levels.
Royalty Pharma (RPRX)
We continue our discussion of overlooked stocks with Royalty Pharma (NASDAQ:RPRX), a dominant player in the pharmaceutical royalty market. The stock offers investors exposure to the lucrative biopharma space. Its pipeline of 45 royalties streams across innovative development projects.
Fourth quarter royalty receipts surged 10% YOY, driven by growth in the cystic fibrosis franchise and key products like Trelegy, Evrysdi and Spinraza. As a result, Royalty Pharma enjoyed a 5% YOY increase in revenue to $596 million. Also, net income showed significant improvement, reaching $494 million, compared with a $456 million loss in the prior-year quarter.
The company has a proven track record of creating value through strategic reinvestment of royalties. This approach generates additional cash flow streams, fueling RPRX’s long-term growth. Furthermore, royalty streams tend to exhibit resilience during economic downturns.
Despite a modest YTD return of 4%, RPRX trades at a discount compared to biopharma peers at 8.6x forward earnings. And, Royalty Pharma stock offers a dividend yield of 2.8%. Currently, Wall Street a 12-month price target of $42.00 for RPRX, implying 44% upside potential.
SPDR Gold Shares (GLD)
Rounding out our discussion of overlooked stocks is the SPDR Gold Shares (NYSEARCA:GLD), the world’s largest physically backed gold ETF. This exchange-traded fund (ETF) offers investors a cost-effective way to gain exposure to the gold market. Launched in November 2004, GLD boasts $61 billion in assets under management.
The ETF’s traditional role as a safe-haven asset makes it particularly attractive during periods of economic uncertainty and heightened market volatility. Its price typically exhibits an inverse correlation to equities, offering portfolio diversification and mitigating downside risk. Many financial advisors recommend a 5% to 10% allocation to gold as a form of portfolio insurance.
So far in the year, GLD has performed well, currently trading above $215, with a gain of over 12%. Given ongoing concerns within the equity market, gold’s positive momentum is likely to persist in 2024. Investors seeking a potential entry point may consider buying the dips, especially around $200.
On the date of publication, Tezcan Gecgil 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
