With thousands of publicly traded companies practically begging for your investing dollars, it can be overwhelming to find the best stocks our market has to offer. And all too often, that means investors end up dedicating too much of their attention to analyzing the stock market's biggest names.
But the best investors know that some of the most under-appreciated stocks can offer superior returns to their more popular peers. So, we asked three top Motley Fool contributors to each pick a stock they believe investors have been overlooking. Read on to see why they chose Darling Ingredients (DAR 4.22%), Oshkosh (OSK -1.63%), and Align Technology (ALGN -4.25%).
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Cooking up fantastic returns
Steve Symington (Darling Ingredients): Ingredients rendering and biodiesel specialist Darling Ingredients may not have the most exciting business, but with shares up more than 35% since the start of 2016 as of this writing, including a more than 13% single-day jump after its strong fourth-quarter 2016 results last week, Darling's performance speaks for itself.
Darling handily beat Wall Street's expectations on both its top and bottom lines last quarter, thanks to broad strength across each of its feed, fuel, and food ingredients segments. What's more, the company is on track for the planned mid-2018 completion of an ambitious expansion to its Diamond Green Diesel joint venture with Valero (VLO -0.40%), which should increase annual production of the facility by over 70%, to 275 million gallons of renewable diesel. Meanwhile, Darling has steadfastly worked to improve its financial profile, paying down nearly $170 million in debt last fiscal year alone.
To be fair, Darling's core rendering business is subject to the ebbs and flows of the markets in which it operates; both foreign exchange fluctuations and any changes in the prices for fats, proteins, and pet food ingredients can have a significant impact on its results. But even when that impact is negative, Darling's relentless focus on operational efficiency, healthy cash flows (operating cash flow of $391 million last year), and steady investments in strategic expansion leave it well positioned to benefit when its markets rebound.
Oshkosh could keep on truckin'
Rich Smith (Oshkosh Corporation): A top stock you've been overlooking? How about Oshkosh Corporation?
I've been pounding the table on Oshkosh stock for years, you know. Yet to this day, I still think a lot of investors think they make children's clothing. Or for those a bit more familiar with the company, that they're focused on civilian trucks. But when I look at Oshkosh, what I see is an undervalued defense company -- one of only a very few bargains still left among military stocks.
Oshkosh, you see, is the company that makes two of the most widely used armored vehicles by the U.S. military, the M-ATV "all-terrain MRAP" and the even newer Joint Light Tactical Vehicle (JLTV -- the armored truck that will replace a lot of the Army's Humvees).
Military trucks are a huge market for Oshkosh, accounting for nearly half of the company's sales in some years. And whether you've noticed it or not, winning these armored vehicle contracts has helped Oshkosh stock to nearly double in value over the past 52 weeks. Nevertheless, at a P/E ratio of 23.5, and more importantly, a price-to-sales ratio of only 0.84, Oshkosh stock still trades at a discount to the average P/S ratio of U.S. defense contractors over the past 20 years or so.
Long story short, just because you overlooked Oshkosh's amazing run over the past year -- or have never even heard of the stock at all -- doesn't mean Oshkosh's run is done. So long as this stock continues to trade under 1 times sales, I think there could still be profits to be made.
Smiles all around
Keith Speights (Align Technology): Dental patients using products made by Align Technology have been smiling for years. Align's Invisalign clear aligners are practically invisible and eliminate the need to wear awkward metal braces. The company's shareholders have been smiling, too: Align Technology stock has nearly quadrupled over the last five years.
But as a mid-cap stock, Align hasn't gotten the attention that larger stocks get. It deserves consideration from investors, though. Align has consistently grown revenue and earnings. The company has made some smart acquisitions -- especially the 2011 purchase of Cadent, which brought the iTero intraoral scanner into Align's product lineup.
Align has a clear pathway for future growth. The company already receives around 35% of its revenue from international sales. Further international expansion should drive sales and earnings higher, particularly in highly populated countries with growing middle classes like China and India.
Not every example of malocclusion (misalignment of teeth) is a fit for Invisalign right now. However, Align is working hard to change that by introducing new clear aligner versions that address more complex cases.
Align has also ventured into new territory by expanding beyond the Invisalign brand. The company forged a deal with SmileDirectClub in June 2016 to supply non-Invisalign clear aligners. SmileDirectClub ships aligners directly to customers' homes. Align gained a 17% equity stake in SmileDirectClub as part of the transaction.
