At the beginning of 2022, equity markets peaked after a massive rally. Through 2021, it was a challenging task to fund undervalued stocks. However, investor interest peaked, and individuals were chasing stocks trading at a substantial premium.
The scenario completely changed with a big correction for growth stocks in 2022. There are still dozens of undervalued growth stocks, and investors have remained cautious. Of course, macroeconomic headwinds are a concern. I would still accumulate the top undervalued stocks and hold them with patience. At the same time, I would remain overweight on blue-chip stocks with a healthy dividend yield.
Buying in a bull market minimizes the potential for big gains. It’s the best time to buy quality growth stocks to deliver multibagger returns in the next 24 to 36 months.
Let’s talk about three massively undervalued growth stocks likely to be portfolio catalysts.
Li Auto (LI)
Almost all electric vehicle stocks have delivered negative returns in the last 12 months. Li Auto (NASDAQ:LI) has been an exception, with the stock increasing by 25%. The rally in bearish industry sentiments speaks volumes about the undervaluation.
I strongly believe that Li Auto is superior to Nio (NYSE:NIO) and XPeng (NYSE:XPEV). This view is not based on the stock price performance. I am talking about the business fundamentals.
As an example, Li Auto reported a vehicle margin of 19.8% for Q1 2023. This is better than peers. Further, the company reported delivery growth of 65.8% on a year-on-year basis for Q1, which is stellar considering macroeconomic challenges.
Li Auto has continued to focus on expansion within China. The company already has 299 retail stores in 123 cities. With a healthy cash buffer and robust free cash flows, the company is positioned for aggressive expansion and investment in product development.
Marathon Digital (MARA)
It seems likely that Bitcoin (BTC-USD) will remain in a gradual uptrend. Bitcoin mining stocks seem attractive, and Marathon Digital (NASDAQ:MARA) is among the undervalued names to consider.
Recently, Marathon reported Q1 2023 results, and the company delivered a revenue and earnings beat. With ambitious growth plans, the outlook for MARA stock is bullish.
An important point to note is that Marathon reported operationalized hashing capacity of 11.5EH/s for Q1. On a year-on-year basis, capacity increased by 195%. Further, the company already has an installed hash rate of 15.4EH/s. The company has guided for a capacity of 23EH/s by June.
Even if there is some delay in achieving this target, Marathon is poised for robust growth. Bitcoin halving is due in 2024, and it’s associated with a rally in the digital asset. Marathon will be positioned for significant EBITDA margin expansion and cash flow upside.
As of Q1, Marathon reported $124.9 million in cash and $326.5 million in digital assets. There is ample flexibility to pursue aggressive growth plans.
Borr Drilling (BORR)
Borr Drilling (NYSE:BORR) has witnessed a rally of almost 50% in the last 12 months. However, the stock remains undervalued at a forward price-earnings ratio of 12. Considering the revenue and EBITDA growth potential in 2023, I expect the stock to double from its current levels.
As an overview, Borr Drilling has a modern jack-up fleet with an average age of six years. For Q1 2023, the company reported revenue and adjusted EBITDA of $172 million and $72.4 million, respectively. This implies a healthy EBITDA margin of 42%. With new contracts coming at a higher day rate, I expect EBITDA margin expansion to sustain.
Another point to note is that Borr reported an order backlog of $1.64 billion as of Q1 2023. The company reported an order intake of $253 million in the first five months of the year. With a strong backlog, there is clear cash flow visibility.
Borr Drilling has already guided for robust revenue and EBITDA upside for the year. Considering the order intake, the positive momentum will likely sustain in 2024.
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.
