With thousands of listed companies, it’s impossible for an investor to be aware of all growth stories. Generally, it’s the stock in news that grabs investor attention. However, there are equally good sleeper stocks that deserve a place in the portfolio.
The thing with sleeper stocks is that trading volumes are relatively lower. This does not attract short term investors. Further, since the stock is not in the limelight, investors prefer to stay away as price action is unlikely to be robust.
However, one of the secrets to successful investing is to buy ideas that are under the radar. There is a high probability that these ideas are undervalued due to lack of market attention. However, when the markets search for value and the focus shifts to these sleeper stocks, returns can be multi-fold.
This column discusses seven undervalued sleeper stocks that are worth considering at current levels.
Agnico Eagle Mines (AEM)
The Federal Reserve left interest rates unchanged. And there’s now the possibility of three rate cuts next year. With that, it’s not surprising that gold is back above $2,000 an ounce. Among the gold miner sleeper stocks, Agnico Eagle Mines (NYSE:AEM) looks attractively valued. Plus, its 3.18% dividend yield stock seems poised for a strong rally next year after being sideways in the last 12 months.
For the first nine months of 2023, Agnico reported revenue of $4.9 billion. What’s important to note is that the all-in-sustaining cost was at $1,162 an ounce. With gold above $2,000 an ounce, I expect a healthy EBITDA margin expansion in 2024.
It’s also worth noting that operating cash flow for year-to-date 2023 was $1.9 billion. If gold trades at $2,200 to $2,400 an ounce next year, OCF is likely to be more than $3 billion. This will support healthy dividend growth. Further, Angico will be positioned to make aggressive investments to ramp-up gold production in the coming years.
Playa Hotels & Resorts (PLYA)
Playa Hotels & Resorts (NASDAQ:PLYA) is up 30% year-to-date. The stock however remains attractively valued at a forward price-to-earnings (P/E) ratio of 19. With the travel and tourism sector witnessing a sharp recovery after the pandemic, the industry outlook supports the bull thesis for PYLA stock.
As an overview, Playa has a portfolio of 26 resorts with 9,756 rooms. These resorts are in Mexico, Jamaica, and the Dominican Republic. Among the positives, Playa reported occupancy of 71.7% for the first nine months of 2023. Further, the Company’s owned resorts had a robust EBITDA margin of 35.2%.
It’s worth noting that the Company is focused on the MICE segment (Meetings, Incentives, Conferences and Exhibitions) through global brand partners. This segment is likely to be a growth driver even if there are no immediate plans on the resort portfolio expansion. Overall, PYLA stock seems like a value creator and as EBITDA margin expands, I expect the stock to trend higher.
Adecoagro (AGRO)
Adecoagro (NYSE:AGRO) stock seems massively undervalued with a forward price-earnings ratio of 7.6. Further, the stock offers a dividend yield of 2.94% and these reasons are enough to be bullish.
However, let me talk about the business perspective. The Company is an agriculture and farmland player. With the global food shortage, AGRO stock is likely to be a potential multi-bagger in the next five years. As an overview, Adecoagro is involved in the farming of sugar, rice, and other agricultural products. Additionally, the Company is in the dairy and ethanol business.
It’s worth noting here that Adecoagro trades at a market valuation of $1.2 billion. In comparison, the market value of the Company’s farmland is $745 million. Besides the potential appreciation of farmland value, the asset is generating positive cash flows through farming activity. This puts into perspective the level of undervaluation. Further, with Adecoagro reporting healthy EBITDA growth and margin expansion, AGRO stock is poised to surge.
Leonardo DRS (DRS)
Leonardo DRS (NASDAQ:DRS) is another one of the most promising sleeper stocks from the defense sector. The emerging company has the potential to create immense value as business metrics look positive and the addressable market is significant.
As an overview, Leonardo DRS operates in the areas of advanced sensing, network computing, force protection, and electric power & propulsion. As of Q3 2023, Leonardo reported an order backlog of $4.7 billion. On a year-on-year basis, the backlog has swelled by 50%. If order intake remains robust, DRS stock is positioned to remain in an uptrend.
It’s also worth noting that the Company is investing in defense innovation. Last month, the Leonardo received an order worth $134 million for its next-generation thermal weapon sights for the U.S. Army.
The Company has also been awarded a contract to produce “next-generation Joint Effects Targeting System II (JETS II) multi-sensor targeting technology for Forward Observers.” Innovation will ensure that revenue growth remains healthy coupled with EBITDA margin expansion visibility.
Amcor PLC (AMCR)
Amcor PLC (NYSE:AMCR) fell by 18% year-to-date thanks to inflationary pressure and growth issues. However, the negatives seem to be discounted and the stock looks attractive at a forward price-earnings ratio of 13.7. Additionally, AMCR stock has a dividend yield of 5.3%.
Amcor is a provider of packaging solutions for food, beverage, pharmaceutical, medical, home, and personal care, among other products. For Q1 2024, Amcor reported revenue de-growth of 7% on a year-on-year basis to $3.4 billion. However, the Company expects to return to growth in the second half of the financial year 2024. This is a key catalyst for stock upside in the coming quarters.
In the next five years, there are multiple triggers for revenue growth. As an example, the Company expects more than $3 billion in incremental sales from emerging markets. Similarly, the Company is strategically shifting to higher value product categories that are likely to contribute $4 billion in incremental revenue.
It’s also worth noting that Amcor is investing $100 million annually in R&D. Innovation and sustainable packaging will ensure that revenue growth remains steady coupled with cash flow upside.
Amdocs (DOX)
Amdocs (NASDAQ:DOX) has been trading sideways for much of the last year. However, a rally of almost 10% in the last month might be an indication of a breakout from a range. My view is underscored by the fact that DOX stock trades at an attractive forward price-earnings ratio of 13.3. Further, the stock offers a dividend yield of 2.0%.
From a business perspective, I am bullish on this provider of software and services to the media and telecommunication industry. With a serviceable addressable market of $57 billion by 2025, the growth outlook is robust.
For financial year 2023, Amdocs reported revenue of $4.9 billion. On a year-on-year basis, revenue increased by 7.7%. Considering the addressable market, it’s likely that growth will accelerate in the next few years.
Another reason to like Amdocs is the cash flow potential. Last year, the Company reported free cash flow of $698 million. I believe that FCF is likely to be more than $1 billion in the next three years. This will translate into flexibility for higher dividends and potential acquisition driven growth.
Lithium Americas (LAC)
Lithium Americas (NYSE:LAC) is another undervalued sleeper stock that’s poised for multibagger gains. Granted, lithium prices have corrected in 2023 and mining stocks have been depressed. However, it’s unlikely that the downtrend will sustain. Reports indicate that lithium shortage can come as early as 2025. It’s therefore a good time to grab some of the best lithium stocks.
For Lithium Americas, the Thacker Pass project is a potential cash cow. It’s worth noting that the Company commands a market valuation of $950 million. In comparison, the Thacker Pass project has an after-tax net present value of $5.7 billion. Further, the asset has a mine life of 40 years with an average annual EBITDA estimate of $1.1 billion. Once lithium starts trending higher, I expect LAC stock to go ballistic.
From a project financing perspective, General Motors (NYSE:GM) is investing $650 million in two tranches. GM also has an off-take agreement for 10 years for phase one of production. A strong partner in the form of General Motors adds credibility to the bull story.
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.
