Quite often, the Street ignores important, upcoming catalysts when it sets its estimates and price targets. There are a few reasons, I believe, for that phenomenon. First, MBA students take many classes on how to compute and handle financial data. However, they receive little to no training on on how to think strategically and analyze trends. Most Wall Street analysts are primarily fixated on number crunching, largely ignoring important catalysts. Moreover, many investors will follow the crowd and avoid buying stocks based on developments that are very likely to occur, but may not materialize. This phenomenon arises from a fear of venturing away from established norms — risk is generally minimized by following widely established practices. Here are three mispriced stocks whose value is being distorted because the Street is ignoring important catalysts.
Coinbase (COIN)
I recently warned that Washington may soon crack down on cryptos. That prediction turned out to be on target, as Congress looks likely to place tight restrictions on stablecoins.
This legislation would limit the type of institutions that can issue stablecoins, potentially eliminating many of the currencies. It would also ban stablecoins not backed by reserves. Coinbase (NASDAQ:COIN) generated revenue of $176 million from stablecoins last year, versus its total sales of $2.83 billion. However, some crypto buyers use stablecoins to fund other crypto purchases, so COIN’s trading revenue could also be negatively impacted.
And much more ominously for COIN, money laundering prevention reforms and bank secrecy evasion laws are likely to be included in the legislation. This could deter some crypto users, thereby reducing crypto demand overall. Since Senate Majority Leader Chuck Schumer is closely involved,t and there’s talk of attaching it to “must-pass” legislation, I anticipate this legislation will move forward.
Despite these huge issues, COIN still has a huge price-sales ratio of 17.9 times. Analysts expect its EPS to jump to $2.32 this year from 40 cents last year.
GE Vernova (GEV)
GE Vernova (NYSE:GEV) builds wind turbines and provides natural gas turbines. It also sells electrical grid improvement equipment.
GEV should benefit from increased global electricity demand, due to the proliferation of AI and transportation electrification. In the U.S., it’s believed that electricity demand jumped 4.7% in 2023.
The acceleration is causing many companies to start building more plants. For example, Calpine is starting work on the first of multiple new natural gas plants in Texas and Southern Company (NYSE:SO) is fast-tracking 1,400 megawatts of new gas-fired power plants.
Additionally, wind energy installations jumped 50% last year to a record 117 gigawatts. Given increased demand for electricity, the sector’s growth could accelerate this year.
Despite all of these positive catalysts, I believe that the forecast for free cash flow of $700 million to $1.1 billion for GE Vernova is likely far too conservative. Consequently, GEV is certainly in the category of mispriced stocks.
NextEra Energy (NEE)
Our last option in mispriced stocks, NextEra (NYSE:NEE), will also benefit from growing electricity demand that I described in the last section.
First, it own America’s largest electric utility, Florida Power & Light. The company profit from higher electricity consumption and rate increases to compensate it for its higher capital outlays.
Morgan Stanley predicts NextEra will benefit from the increasing demand for power by data centers.
Since NEE will benefit from accelerating electricity demand in two ways, I believe that analysts’ average estimate for a 5% increase in its EPS this year is too conservative.
On the date of publication, Larry Ramer held a long position in GEV and a short position in and put options on COIN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
