Investing in undervalued stocks presents a prime opportunity for substantial returns. Identifying such stocks requires evaluating their fundamental strengths, industry positioning and growth potential. This August, three companies from diverse sectors demonstrated the potential for undervalued stocks to deliver significant gains.

One sector to consider is insurance, which has shown resilience and growth. Companies in this industry often provide stability and steady returns due to their essential services and financial robustness.

Another promising sector is professional services, particularly executive search and recruitment. This industry can thrive even during economic downturns as businesses seek top talent for strategic roles. Companies that demonstrate high profitability and operational efficiency in this sector are poised for significant growth despite facing external challenges.

Finally, the regional banking sector offers compelling opportunities, especially for institutions that maintain high net interest margins despite increased costs. This resilience, particularly in a rising interest rate environment, highlights effective management and a strong market position, making such companies attractive to investors.

NMI Holdings (NMIH)

NMI Holdings (NASDAQ:NMIH) specializes in insurance and has a record-high insurance coverage. NMI Holdings closed Q2 2024 with a solid $203.5 billion in high-quality insurance, marking the first time the insured portfolio has hit over $200 billion. This growth reflects the company’s long-term lead in building a robust portfolio. The increase in insurance in force in Q2 indicates a 2.1% sequential growth and a 6.4% annual increase. 

Moreover, NMI Holdings’ credit performance continues to stand ahead, with 4,904 defaults at the end of June, down from 5,109 at the end of March. The default rate declined to 0.76% in Q2. Similarly, the loss ratio improved to 0.2% against 2.7% in Q1 2024 and 2.3% in Q2 2023. The company saw continued growth in investment income. This increase is attributed to deploying new cash flows and reinvesting rolling maturities at favorable new money rates.

Overall, NMI Holdings’ solid bottom-line growth and credit performance led to it being at the top of the list of undervalued stocks.

Heidrick & Struggles International (HSII)

Heidrick & Struggles International (NASDAQ:HSII) focuses on executive search and consulting. The company’s adjusted EBITDA for Q2 2024 was $28.8 million, yielding a margin of 10.3%, a decrease from the previous year’s $34.9 million with a 12.9% margin. Indeed, several factors led to this decline. For instance, non-recurring expenses impacted adjusted EBITDA, including a $16.2 million goodwill impairment and a $6.9 million restructuring charge. Excluding these, the adjusted EBITDA margin would have been 12%, indicating a solid operational edge and profitability.

Further, the Executive Search segment maintained a robust adjusted EBITDA of $52.7 million. The margin here was 25.1%. Excluding non-recurring costs, the margin would have improved to 26.9%, reflecting solid performance and profitability in this core area. Heidrick Consulting showed improvement despite a loss of $1.4 million. This was better than a loss of $1.7 million in the previous year. Excluding non-recurring costs, the loss was reduced by 50%. This highlights progress in this area and the company’s efforts to maintain profitability.

Despite operational challenges highlighting its growth potential among top undervalued stocks, Heidrick & Struggles holds a positive bottom line in core segments.

TFS Financial (TFSL)

TFS Financial (NASDAQ:TFSL) operates in regional banking. For the quarter ending June 2024 (Q3 fiscal 2024), net interest income decreased by $2.1 million. This represents a 3% decline that led to $69.3 million against the previous quarter. Additionally, year-to-date net interest income for nine months was $209.7 million. This is a decrease of $3.5 million, or 1.64%, from the same period in 2023. The higher cost of interest-bearing liabilities caused this decrease. Certificates of deposit mainly contributed to the rising costs that reflect the company’s fundamental capability to attract and retain deposits despite higher interest rates. 

Moreover, the net interest margin for the quarter was 1.67%, slightly lower than the 1.71% margin from the previous quarter. Over the fiscal year, the net interest margin fell from 1.82% to 1.69%. Despite this margin compression, TFS Financial maintains a high margin and interest spread that demonstrates strong management of interest rate risks.

Overall, the company sustains profitability even with rising costs. TFS Financial’s high net interest margin points to resilience in a challenging interest rate environment.

As of this writing, Yiannis Zourmpanos held a long position in HSII. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.