As a rule of thumb, investors ought to consider securities with strong volume and chart mobility as opposed to sleeper stocks. It’s like baseball. Some teams may thrive on “chaos” that may work out during the playoffs. However, their inconsistency during the regular season prevents them from doing their thing.
So it is with sleeper stocks. While it’s a sexy idea to pick up underappreciated securities, they risk continuing to be ignored. After all, if they were clearly compelling, they wouldn’t be considered sleeper stocks. Nevertheless, some opportunities may just need a little patience to blossom. In particular, we’re going to look at rumblings in the options market, especially the volatility smile. This indicator plots the implied volatility of a given options contract at various strike prices. While it doesn’t tell us directional sentiment, the shape of the smile gives us an idea of anticipated activity among the smart money traders.
With that, below are the best sleeper stocks to buy now.
IBM (IBM)
Although I’ve mentioned IBM (NYSE:IBM) on several occasions, I believe it makes perfect sense as one of the best sleeper stocks to buy. Sure, it’s not nearly as sexy as other technology enterprises focused on artificial intelligence. However, Big Blue is massive and it invests billions every year in research and development, much of that directed to AI and machine learning.
To be upfront, analysts don’t agree, with the consensus sitting on hold. Also, the average price target comes in at $143.20, implying more than 3% downside risk. However, investors should consider IBM’s volatility smile. On Tuesday, IBM closed at $148.13. From the $160 strike price, IV of 0.14 soars to 0.32 at $180. In my interpretation, several traders recognize the long-term upside potential.
In fairness, IV stands at 0.28 at the $115 strike price. Therefore, some traders have likely mitigated sudden volatility. In my view, IBM is one of the sleeper stocks just looking for the right catalyst.
Lyft (LYFT)
To be frank, I can fully appreciate why ride-sharing outfit Lyft (NASDAQ:LYFT) is one of the top sleeper stocks. Overshadowed by its rival Uber Technologies (NYSE:UBER), the latter entity’s security gained almost 84% since the January opener. On the other hand, LYFT has only returned a bit more than 6% of its value to shareholders. Obviously, it’s a rough comparison.
For full disclosure, analysts also don’t give much hope for the smaller ride-sharing firm, who peg LYFT as a hold. Also, the average price target of $12.26 symbolizes less than 4% upside potential. However, it could be a candidate for best sleeper stocks for speculators and that’s because of the underlying volatility smile.
In fairness, IV spiked to an enormous magnitude of 1.19 at the $5.50 strike price. On Tuesday, LYFT closed at $11.84. Thus, some traders appear to be extremely concerned about volatility. However, from IV of 0.54 at the $12 strike, the metric rises to 0.91 at $21. This setup suggests that many traders anticipate possible long-term growth after years of disappointment.
Waste Management (WM)
A name that sells itself as one of the best sleeper stocks to buy, Waste Management (NYSE:WM) is almost perfect. No one that I know gets up in the morning excited to trade a waste services enterprise. But on a fundamental level, the company is vital to overall infrastructural stability. After all, somebody has to deal with all the waste that humans produce.
To no one’s surprise, Wall Street appreciates WM, pegging it as a moderate buy. Analysts also anticipate shares hitting $179.41 on average, implying over 14% upside potential. Looking at options flow data – which focuses on big block trades likely made by institutions – the major players are selling $140 puts that expire on Oct. 20, 2023. Generally, sold puts have bullish implications.
Keep in mind that WM closed at $157.03 recently. From the $165 strike price, IV rises from 0.12 to 0.66 at the $235 strike. While an IV of 1.07 at $90 indicates risk mitigation, the activity above $160 suggests possible optimism longer term. So, it’s one to keep on your radar.
Qualcomm (QCOM)
One of the most powerful names in tech, Qualcomm (NASDAQ:QCOM) specializes in semiconductors for the wireless ecosystem. However, with chip manufacturers hurting thanks to consumer slowdowns for smartphones and PCs, Qualcomm hasn’t been performing well. Since the beginning of this year, QCOM gained just under 9% of its market value. In contrast, the Nasdaq Composite moved up 35%.
Still, if you’re looking for the best sleeper stocks to buy now, QCOM presents an enticing opportunity. First, you get the backing of Wall Street analysts, who peg shares as a consensus strong buy. In addition, their average price target lands at $137.63, implying over 18% upside potential.
Second, the underlying volatility smile for QCOM options offers food for thought. Yes, I must state that IV of 0.62 at the strike price of $70 is very much elevated. On Tuesday, QCOM closed at $116.55. However, from the $126 strike, IV rises from 0.24 to 0.55 at $170. This framework signals possible upside anticipation among some traders. Also, the latest options flow activity shows heavy volume (and open interest) for acquiring $120 calls with a Sept. 15, 2023 expiration date.
PayPal (PYPL)
Bruised and battered since the last several weeks of 2021, PayPal (NASDAQ:PYPL) could use a comeback. Unfortunately, it continues to suffer skepticism from investors. Since the January opener, PYPL slipped almost 15%. On a fundamental note, though, it could rank among the best sleeper stocks due to the gig economy. With major corporations getting aggressive about return-to-work protocols, this could be PayPal’s time to shine.
Interestingly, analysts seem to support the idea, pegging PYPL a moderate buy. Even better, their average price target clocks in at $87.38, implying over 37% upside potential. Second, PYPL’s volatility smile warrants additional investigation.
Recently, PayPal stock closed at $63.74. From an IV of 0.28 at the $67 strike price, the metric shoots up to 0.49 at the $95 strike. In fairness, IV stands at 0.52 at $40, implying aggressive risk mitigation. However, traders are also aware of the potential for PYPL to drive up longer term. Conspicuously, options flow data shows institutional traders selling $55 puts with an expiration of June 20, 2025. Therefore, the smart money probably doesn’t anticipate PYPL from falling much from here on out.
Alibaba (BABA)
Given the many questions plaguing the Chinese economy and the resilience of its consumer base, it’s not shocking to see Alibaba (NYSE:BABA) as one of the sleeper stocks. Since the beginning of the year, BABA only managed to return shareholders just under 3% of equity value. In the past 365 days, it only moved up a hair over 7%. Clearly, the e-commerce and tech giant could use a positive catalyst.
That might be coming, at least based on analyst sentiment. Presently, the experts peg BABA a consensus strong buy with a $141.31 price target, implying over 49% upside potential. Second, BABA features an intriguing volatility smile that might warrant further investigation.
On Tuesday, shares closed at $94.65 in the open market. From the strike price of $91, IV rose from 0.36 to 0.77 at the $160 strike. In fairness, traders appear to recognize the risks associated with China’s slow economic growth. Thus, IV stands at 0.88 at $45. Nevertheless, traders seem to also believe in BABA’s upside potential. Ultimately, it’s one of the sleeper stocks to consider for gamblers.
General Motors (GM)
Perhaps my favorite idea for best sleeper stocks to buy now, General Motors (NYSE:GM) warrants a closer look. At first glance, it doesn’t seem very promising. Since the start of the year, GM lost about 2% of market value. However, it commands significant upside potential for its ability to electrify its many iconic car brands. Stunningly, this directive includes the vaunted Corvette.
I have a strong feeling GM will kick the rear quarters of “the company that shall not be named.” The unnamed enterprise, while powerful consistently delivers boring and sometimes bizarre designs. In contrast, GM is exciting. That’s part of the reason why analysts peg shares a moderate buy with a $50.33 forecast, implying over 51% upside.
Just as importantly, traders appear to be placing their bets on GM based on its volatility smile. Okay, with a closing price of $33.28, it’s fair to point out that some hedging may be going on. IV jumps to 0.53 at the $23 strike. However, IV also stands at 0.56 at the $50 strike. If you’re a speculator, you need to look at GM right now.
On the date of publication, Josh Enomoto 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.
