Some of the best values in the market are stocks that have been beaten down to the point where almost no one seems to be bullish. That's not universally true, of course, but successful comebacks can lead to massive gains. Here's why Fitbit (FIT +0.00%), Plug Power (PLUG 2.06%), and General Motors (GM 0.52%) are three underdog stocks to keep an eye on.
A fall from grace
Tim Green (Fitbit): Fitness wearables company Fitbit had a bad holiday season, and its guidance for 2017 represents just about the worst-case scenario. The company won't report its full results until later this month, but its preliminary figures paint a troubling picture. Holiday-quarter sales fell well short of guidance, and Fitbit expects sales to plummet by as much as 30% this year. Fitbit posted a net loss during the fourth quarter, and it expects to be unprofitable in 2017 as well.
Fitbit is laying off about 6% of its workforce in an effort to cut costs, but that's a drop in the bucket following the headcount explosion over the past couple of years. Fitbit vastly overestimated demand for its products, and it will take a while for the company to adjust to its new reality.
Image source: Fitbit.
Fitbit is an interesting stock because its brand is still popular, and the balance sheet is rock solid. Fitbit stock would need to be extremely cheap for me to be interested -- probably below book value. The stock tumbled in 2016 and crashed further following the preliminary results, but I think it's still fairly risky.
Fitbit had $672 million of cash and no debt at the end of the third quarter, with cash accounting for around half of its market capitalization. Fitbit will burn through some of that this year as it tries to turn itself around, though, and there's no guarantee the company will return to profitability anytime soon. I'm watching Fitbit, but I'll need a lower price before I consider buying the stock.
A sleeping giant
Daniel Miller (General Motors): If you're looking for an underdog stock, one industry with a plethora of low-hanging fruit is certainly the automotive industry. Yes, new-vehicle sales in America are plateauing, but General Motors is doing so many things right these days -- take a look at three 2016 highlights.
- Chevrolet Bolt electric vehicle earned top honors with the 2017 Motor Trend Car of the Year award.
- Chevrolet took home more 2016 J.D. Power Initial Quality awards than any other brand.
- General Motors was recognized by IHS Markit as the company with the best "Overall Loyalty to Manufacturer" for the second consecutive year.
In other words, General Motors is making better cars, keeping its consumers within its brands, and doing so more efficiently than it has in a decade. General Motors is also cutting back on its percentage of profit eroding rental vehicle fleet sales, consolidating its number of global vehicle platforms to cut on costs and returning an increasing amount of cash flow to shareholders.
But the one factor that makes General Motors an underdog to watch, especially as new-vehicle sales peak, is that nobody is quite sure what the future of smart mobility -- think of overnight sensations similar to Uber -- and autonomous vehicles will be. It's a scenario that reminds me of Facebook in its early years, when the bear thesis was "Facebook doesn't generate revenue from mobile phones." That was true, until the day Facebook started trying to generate revenue on mobile phones, and then Facebook's stock took off as it succeeded beyond people's wildest imaginations.
General Motors is definitely an underdog to watch because it's a massive company building better products by the day, and we haven't seen what the automotive giant can do when it gets serious about smart mobility projects.
Why is the future of hydrogen?
Travis Hoium (Plug Power): Plug Power has had a love/hate relationship with the stock market over the last few years as shares have soared and plunged depending on the market's mood. And I haven't been a big fan of Plug Power's constant cash burn and seemingly endless promise of a better future that never quite arrives.
But I'm watching Plug Power to see if it can show us anything about what potential hydrogen may have as an energy storage medium in the future. The company has been fairly successful developing and selling hydrogen as a fuel for fork lifts, but is there going to be traction beyond that? Plug Power has an agreement to develop fuel cells for vehicles in China, and it introduced a stationary fuel cell recently. But will these products gain any traction, and will they generate revenue and earnings before Plug Power goes out of business?
These are important questions to consider, because I think hydrogen has tremendous potential as an energy storage medium, but it has never really lived up to that potential. It seems to get into niche markets like fork lifts, but it never really moves into the mass market, where it could make a real difference in the way we look at energy. Plug Power is peeking into those markets, and if it has success, it could tell us a lot about the future of energy. But if Plug Power goes bankrupt, that could be equally telling about the future of hydrogen.
