As the broader market plateaus after its recovery rally, there remain hidden pockets of value across under-followed sectors, and with smaller-cap companies. With investors fixated on mega-cap tech and blue-chip stocks, many quality companies without much coverage continue to trade at a discount. Of course, one man’s trash is another man’s treasure, and many value investors know that obscurity also creates opportunity.
Digging underneath the surface of these under-the-radar stocks, investors can often unearth compelling businesses that hold massive unrealized potential. Though less conspicuous than most stocks, I believe these have the potential to deliver outsized returns when their future catalysts are unleashed. Indeed, their upside could significantly outperform benchmark averages.
Here are the three under-the-radar stocks I’m going to highlight today.
Mitek Systems (MITK)
Mitek Systems (NASDAQ:MITK) provides AI and machine learning solutions for mobile identity verification across various industries. The stock has fallen more than 60% from its peak, but seems to have found a bottom, rallying 22% over the past six months. While the business has faced pandemic-related headwinds like many software firms, I believe Mitek has substantial upside potential as its solutions become even more critical in the years ahead.
Mitek’s second-quarter earnings report showed the resilience of its business. Revenue grew 35% year-over-year to $45.3 million (30.5% with currency adjustments), ahead of expectations. Its deposit business, which includes mobile check deposit and check fraud prevention, rose 35%. The company’s identity verification business also grew 35%, as Mitek continues to leverage AI and biometrics to combat identity fraud.
Notably, the company’s margins also remained strong. Mitek reported a gross margin of 87% and non-GAAP operating margin expected at 30% for 2023. Furthermore, the company generated $6.3 million in operating cash flow during the quarter and $114 million in cash and investments. Mitek expects 18% revenue growth this fiscal year.
Looking ahead, Mitek is uniquely positioned as AI image generation progresses exponentially. With AI being able to generate realistic faces and voices, identity theft is becoming a serious issue. Mitek’s multimodal biometric authentication solutions will only increase in importance in verifying real users.
In our digital age, every online interaction requires identity verification for security and regulatory compliance. Mitek’s AI-powered offerings reduce friction for consumers, while combating fraud for businesses. Thus, I believe, MITK is poised for significant upside after its sell-off. The consensus price target at $19.33 also implies 79% upside potential over the next year.
Shyft Group (SHYF)
Shyft Group (NASDAQ:SHYF) operates in vehicle manufacturing for last-mile delivery, infrastructure, and other specialty applications. Like Mitek, SHYF has endured a steep decline, with shares tumbling 70% in from its peak. However, after finding support around the $15 level, I believe the stock offers compelling value for long-term investors.
Shyft’s second-quarter earnings wasn’t the best. Revenue declined 3% year-over-year to $225 million. Last-mile delivery sales faced headwinds as parcel volumes declined from pandemic peaks and customers managed costs. Motorhome chassis sales also softened amid RV industry challenges. Still, Shyft posted adjusted EBITDA of $16 million, up 16% year-over-year.
Importantly, Shyft made progress on key strategic initiatives like its Blue Arc EV van production. The company remains on track to deliver 50 initial EV units in Q4 2023, and scale up in 2024. As Shyft diversifies its revenue mix over time, this clean vehicle opportunity offers substantial growth.
While 2023 results were hit by macro pressures, analysts expect a significant rebound moving forward. The company’s earnings per share are forecast to jump 98% in 2024 after a 58% decline this year. Revenue growth is also projected to recover into the double-digits. The stock’s forward price-earnings ratio of just 14.5-times is reasonable, based on what I think are conservative 2024 projections.
With its leading brands and flexible operations, Shyft can navigate cyclical downturns in its markets. The company is leveraging its strong balance sheet and cash generation to fund investments in EVs and other innovations. Once end markets stabilize, SHYF appears primed for a major comeback. The consensus price target of $19.5 represents 30% upside for SHYF stock.
CarGurus (CARG)
CarGurus (NASDAQ:CARG) operates an online automotive marketplace connecting buyers and sellers. After declining 70%-plus last year from its peak, the stock has so far rallied 35% off its November lows. Of course, used vehicle markets face uncertainty, but I believe CarGurus remains well-positioned for the long haul.
CarGurus’ latest quarter beat expectations, with revenue declining 53% year-over-year to $239.7 million. The company generated strong EBITDA of $45 million. Its core listings marketplace continues to grow, surging 4% year-over-year. While its newer wholesale segment faced challenges, operational improvements drove a return to profitability. Revenue growth may look poor right now, but I’ll get into that later.
Importantly, CarGurus made strides with its digital retail capabilities. Adoption of its Digital Deal offering grew 29% sequentially, enhancing dealers’ sales efficiency. The company is rapidly building an end-to-end transaction platform to support dealers and consumers through AI and advanced online tools.
Looking ahead, analysts forecast substantial growth for CarGurus. Revenue is projected to rise at a 22% compounded annual growth rate (CAGR) from 2024-2032 as digital retail gains traction. Earnings are also expected to more than quadruple during that period. The company trades at a reasonable forward price-earnings ratio of 16-times, for all that growth. Thus, the $23.80 consensus price target with a 35% upside potential is very much achievable in one year.
On the date of publication, Omor Ibne Ehsan 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.
