This kind of market offers big discounts to quality businesses. There are stocks that have been under the radar of big investors and offer retail investors a chance to buy into these companies at bargain-basement prices. The following companies offer tremendous upside for investors once near-term catalysts happen.
OneBeacon Insurance Group, Ltd. (OB)
Shares of OneBeacon Insurance Group declined 13.66% for the year. The reason for its underperformance is that it is selling some of its business lines to focus on higher-performing specialty operations. The market does not like uncertainty and punished the stock for deciding to transform itself into a leaner company. Moving forward, this will be beneficial as the company will be able to free up a lot of capital and redeploy it to profitable ventures. The result is a cheaper price and opportunity for investors with longer time horizons.
The current price of $13.21 suggests a 7.42 times trailing earnings and 6.40% dividend yield. This is definitely lower than insurance giants in the property and casualty space. White Mountains Insurance Group (WTM) trades at 12.44 times earnings and 0.30% dividend yield, while Markel Corp. (MKL) also trades higher at 15.44 times earnings. Although WTM and MKL are priced higher due to better profitability, OB will have a better earnings visibility moving forward. The stock has limited coverage from analysts. This might imply that the future prospects of the company may not have been discounted in the price. The stock is relatively illiquid, but the high dividend yield compensates for that risk.
Limelight Networks, Inc. (LLNW)
LLNW is one of the long-term bets on the future of cloud computing. It provides content delivery services through long-term contracts with clients. The company’s recent strategy is to snap up smaller companies to grow its offering. It has acquired EyeWonder, Chors Gmbh and Delve Networks, Inc. in 2010. These companies are interactive digital providers and cloud-based analytics service. Recently, it has also acquired Clickability and AcceloWeb. This resulted to a revenue growth of 53% a year for the last 5 years, better than the 23% revenue growth of the industry.
At present, the stock is trading at below 80% of its book value. The reason is that the company is expected to post a net loss for the year. This is mostly due to expenses associated with the acquisitions of the company. With this, we may have to look at sales as a metric to value LLNW. Industry peers like Akamai Technologies Inc. (AKAM) and Salesforce.com (CRM) trade at 3.63 times and 8.86 times revenues respectively. This is higher than LLNW’s 1.31 times revenues. Assuming they could earn $201 million next year, the stock could be valued at $729 million to $1.68 billion. The near-term catalyst to this is an acquisition from bigger companies with cloud exposure.
Q.E.P. Co., Inc. (QEPC.PK)
QEPC is a manufacturer and seller of a product line of specialty tools and flooring-related products for home improvement. For the year, the stock has gained 49.16%. Despite outperforming the market, the stock still remains undervalued. The reason is that it is relatively illiquid and trades on pink sheets. Its current business does not appeal to investors looking for exciting growth industries. The 5-year revenue growth rate appears low at 2.89%, as the revenues declined during the financial crisis. However, it has managed to post earnings per share growth of 59% over the same period. The reason is the company has been buying back shares in the market while keeping their capital spending at low levels.
The stock is currently trading at 6.21 times trailing earnings, lower than The L.S. Starrett Company's (SCX) 17.21 times earnings and Snap-On, Inc. (SNA), valued at 12.38 times earnings. It looks like the market is not yet convinced that it could post modest growth in the coming years. At first glance, investors would be worried at the performance of the housing market. Despite a sluggish housing market this year, QEPC has posted revenue growth of 13.60% year on year. With a market cap of $69.67 million, it would be a good steal for a company looking to expand its portfolio of home improvement products.
Tata Motors Limited (TTM)
Tata is an auto company based in India. The company is known for its low-cost vehicles, but has started to diversify its business into the luxury market. It has acquired Jaguar and Land Rover, giving the company an entry into these markets. For the last 5 years, revenue has grown 38.63% and earnings per share at 26.01%. These growth rates appear above-average considering that Ford Motors Co. (F) and Toyota Motor Corp. (TM) posted negative growth for the period. The reason is the drive to innovation and focus. During the period, the company has increased its spending by 50% a year to fund these initiatives.
The company is expected to earn $3.42 a share this year. This implies an earnings multiple of 4.68 times. This is lower than peer companies, which trade at 7 to 12 times earnings for the year. Historically, the stock trades between 10 to 15 times earnings. At that rate, the stock could trade at $34 a share, or double from the current price levels. This could be a possibility a few years down the road, as India’s economy is growing at a faster pace. However, TTM investors would have to wait until macroeconomic headwinds disappear.
Lloyds Banking Group Plc (LYG)
Lloyds Banking Group provides banking and financial services in the United Kingdom. Given the current situation of the European debt crisis, it’s easy to see why banking stocks have underperformed. For the year, LYG has declined by 49.15% and trades slightly higher than its 52-week low. At present, it is focus on getting rid of non-performing businesses and cutting down on costs.
At the current price of $2.10 a share, the stock is trading at 9.54 times next year’s earnings and 0.65 times book value. This is cheaper than HSBC Holdings Plc (HBC), which trades at 10 times earnings, and Royal Bank of Canada (RY) at 13.60 times earnings. Given the trailing net loss of LYG, the market attributes zero value to its future earnings. Adding to pressure is the possibility that credit rating agencies will be downgrading UK banks for tough new regulations. Investors are worried that regulations may limit the profitability of the banks moving forward. The important question that investors should ask is whether banks can survive in this kind of environment. In our view, the move to sell branches to raise capital for LYG is definitely a big assurance to investors. The analyst ratings are mixed, and the stock has a target price of $4.58 a share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.