3 Top Stocks Investors Continue to Overlook

Being a great investor isn't easy. It requires patience and a knack for finding companies everyone else has overlooked. That's part of the fun for many investors, though -- hunting through piles of 10-K filings hoping to unearth a winner and load up your watch list with phenomenal companies. If that's what you're into, here are three great and mostly overlooked companies to add to your watch list.

Comfortable fit for portfolios

Image source: L Brands Inc.

Chances are you haven't heard of L Brands (BBWI -1.39%) before now, but you've likely heard of its brands, and possibly even ventured through one of its stores. L Brands is a retailer in categories such as intimate, beauty, and personal care through its well-known Victoria's Secret, Pink, and Bath & Body Works brands, among others. In total, the company operates 3,085 company-owned specialty stores and has an increasing e-commerce presence.

Victoria's Secret and Bath & Body Works are two powerhouse brands that generate nearly 90% of the company's total sales. The great thing for investors is that the brands' specialty retailing niche commands pricing power as consumers are willing to pay for a premium product, and that's reflected in the company's 40%-plus gross margins. But this year brings something of a speed bump for L Brands as it exits lower-margin product lines, begins new marketing initiatives, and expands in China. Those headwinds will dampen the company's 2016 results, but the moves will leave it better-positioned to sustain 7%-10% annual revenue growth, which management has noted as a reasonable goal.

There are also long-term opportunities for the company to boost margins as it discontinues the Victoria's Secret catalog, exits lower-margin product categories, reduces product lead time, and scales its business in China. Management has already been fine-tuning the company's operating performance, and the results are evident in the way L Brands' EBITDA growth is far outpacing top-line growth.

LB Revenue (Annual) data by YCharts.

L Brands, thanks to its pricing power, well-known brands, and international growth story, certainly warrants a spot on investors' watch list in case 2016 brings a dip in stock price due to the headwinds mentioned.

Going once, going twice

Ritchie Bros. Auctioneers (RBA 0.03%) has been one of my favorite stocks over the past couple of years -- its price is up 65% over the past 12 months alone -- even though it remains under the radar for many investors. Ritchie Bros. is the world's largest auctioneer of heavy equipment for construction, farm, mining, and other uses.

The reason Ritchie Bros. has been one of my favorite stocks is because no competitor can replicate its network effect anytime soon, if ever. As an auctioneer, it enjoys a virtuous cycle of an increasing number of registered bidders, which attracts more equipment sellers, which again creates more buyer interest. During the third quarter, consignors increased 18% compared to the prior year, with 14% more registered bidders and 16% more buyers.

Further, RBA is evolving with the world and has focused on growing its online presence. That's opened the door for bidders to access RBA auctions from any place on the planet. Consider that at the beginning of 2012 just under 70% of RBA's gross auction proceeds were onsite or in person, and as of the most recent quarter, it's a 50% split between onsite and online.

RBA offers investors a compelling business model in its network effect and scale. In regard to scale, consider that RBA was roughly four times the size of its next closest competitor, IronPlanet, before RBA acquired the company. Because of that, RBA seems well positioned to dominate the auction business for the foreseeable future.

In it for the long haul

XPO Logistics (XPO -1.93%) is a massive top 10 global logistics company with a footprint in 34 countries, over 86,000 employees, and 1,425 locations. It uses that massive network to help its customers manage their goods more efficiently through their supply chains.

XPO Logistics generates a little more than 60% of its revenue from transportation of freight, and a little less than 40% of revenue from logistics where it adds value to customers' services to help optimize supply chains and distribution, among other services.

After an acquisition spree, XPO's top line has exploded over the past couple of years.

XPO Revenue (Annual) data by YCharts.

Management has since pumped the brakes on acquisitions and is now focused on creating more bottom-line growth, which is great for investors. Management mapped out an internal plan to create cost synergies (including migrating most of the company's operations onto a single CRM system), improve profitability, and reduce debt.

There's opportunity for the company to cut costs and juice its bottom line, but there's another reason or investors to be bullish. After all the acquisitions and a slew of services offered, there's now more opportunity than ever for XPO to cross-sell its services to its large customers.

While the company's potential is evident, the downside is that investors will have to pay a premium to buy shares. Currently XPO trades at 28 times forward earnings, according to Morningstar estimates, but if investors can remain patient, a buying opportunity will eventually present itself.