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3 Stocks Wall Street Wants to Keep Secret

By Anders Bylund, Jordan Wathen, and Keith Noonan – Jun 26, 2017 at 9:45AM

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Here's a closer look at three stocks you've never heard of before.

You may not fully understand Capital One Financial (COF -2.40%), and what makes it unique. (CYOU) may even be a mystery to you. And while you might have used Gogo (GOGO -3.28%) services on your last long-haul flight, it's likely that you've never considered that company as an investment.

Let's change all that, right now. These are the three best investments you've never heard of, hand-picked by a panel of The Motley Fool's top contributors.

Businessman picking out a golden egg from the nest.

Image source: Getty Images.

Change who?

Keith Noonan ( Have you heard the buzz about the massively multiplayer online video game series Tian Long Ba Bu (TLBB)? Okay, probably not, and I'd bet that series' English title Dragon Oath isn't much more recognizable to the vast majority of stateside video game fans and industry watchers -- and that's a good thing. 

If you're on the hunt for hidden stocks, it's often advisable to look for companies stationed outside the U.S., and could be a gem in a fast-growing industry. The Chinese entertainment company spun off from former parent company in 2009 and specializes in online video games. While it's not currently grabbing headlines the way that American publishers like Activision Blizzard and Electronic Arts are, its stock could be one of the best buys in the industry for non-risk-averse investors. The company recently launched TLBB on mobile, and given that Sohu recently boosted its guidance due to the game's performance, it looks like one of's most important games has landed as a hit.

While most U.S. video game companies now trade at somewhat high-flying multiples, still looks like a bargain, with shares valued at roughly 11 times forward earnings estimates. Hitting those earnings estimates would also give the company a price-to-earnings-growth ratio of roughly 0.35, and, with a market cap of roughly $2 billion, there's still plenty of room for explosive growth.

For your eyes only: This in-flight broadband service is set to soar

Anders Bylund (Gogo): In-air broadband access specialist Gogo is standing on the threshold of a game-changing technology breakthrough. Actually, make that two game-changing breakthroughs.

The company is installing so-called 2Ku satellite broadband connections at a breakneck speed right now, adding roughly 500 aircraft in 2017 and another 700 next year. That's up from only 170 2Ku installations completed so far, and will be followed by aviation giant Airbus adding Gogo 2Ku systems at the factory. Since Airbus currently has more than 17,000 unfilled aircraft orders, that's a pretty significant market opportunity for Gogo.

Beyond the 2Ku bump, Gogo is already preparing to launch an even faster air-to-ground platform. This service will match or beat the broadband speed of Gogo's 2Ku connections to lower the strain on the 2Ku satellite links and leverage Gogo's existing network of ground-based network stations. The next-generation ATG system will launch in 2018.

Together, these technology upgrades open the door to incredible growth for Gogo and its investors. The expensive 2Ku installations are a drag on Gogo's profits and cash flows right now but management expects to reach positive cash flows in 2019 and bottom-line profits before that.

Yet only a handful of analysts bother to cover Gogo and independent analysis of this company is a rare find. Against this lack of Wall Street and media interest, share prices have fallen 46% in the last two years.

Maybe it's because it takes some technical jargon to explain Gogo's business value, or perhaps the Street just doesn't see how 2Ku and the new ATG network will help Gogo investors. Either way, I think this company deserves much more attention, as its stock seems primed for a huge surge in 2018 and beyond.

Consultant consulting with a client.

Image source: Getty Images.

The new bond market

The best in high-risk banking

Jordan Wathen (Capital One Financial): While bank stock tourists are piling into interest-rate sensitive banks to bet on interest rates, bank investors are happy to snap up cheaper shares of banks that make more income from taking credit risks. 

Capital One may have its less attractive features -- at its core, it’s a subprime card and car lender -- but it proved its underwriting mettle in during the financial crisis, when charge-offs were substantially lower than peers that operate in similar business lines.

Now, Capital One’s charge-off rates are heading higher, but if history is any guide, it should be able to navigate a downturn in consumer credit far better than most. In the first quarter, net charge-offs jumped to 2.5%, up from 2.1% a year earlier. Credit cards were the primary driver of the increase, as charge-offs jumped nearly one full percentage point to 5% of total loans.

But Capital One isn’t one to hide credit challenges, and it's been forthcoming about its expectations for higher losses and more reserve building in the quarters ahead. Its allowances as a percentage of loans held for investment rose to 2.9%, up from 2.4% a year ago. A higher level of provisions may be here for the remainder of the year, partly due to what Capital One calls "growth math," or the reality that a growing loan book requires larger provisions for losses.

But with shares trading at about 1.4 times tangible book value, Capital One seems to have been completely forgotten in the bank stock rally, and buyers would prefer it stays that way. It’s my view that the Fed’s upcoming stress test results will show Capital One in a positive light, and help investors better understand its relative value compared to much more highly-priced bank stocks. 

Anders Bylund has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Keith Noonan owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts and The Motley Fool has a disclosure policy.

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