There are several reasons that some stocks are underappreciated. It could be that a stock is flying under the radar, or perhaps it's outperforming its peers, sparking valuation fears. But savvy investors are able to sift through the clutter to find opportunities others may shun.
Tim Brugger (NVIDIA): With its stock price up 52% in 2017, some may pass over graphics-chip king NVIDIA, but not savvy investors in search of growth. Why? Because despite NVIDIA's jaw-dropping first quarter, in which revenue soared 48% to $1.94 billion and earnings per share (EPS) more than doubled to $0.79 from last year's $0.35, the best is still to come.
Among the keys to NVIDIA's strong start to 2017 were its forays into deep learning or artificial intelligence (AI) and their impact on data-center results. Founder and CEO Jensen Huang cited a nearly threefold increase in NVIDIA's data-center graphics processing unit (GPU) sales last quarter as a primary driver of those impressive results.
As Huang put it, "One industry after another is awakening to the power of GPU deep learning and AI, the most important technology force of our time." In a market expected to grow nearly 60% this year generating $12.5 billion in revenue, and more than $46 billion in just three years, NVIDIA's AI leadership position is right on target.
It's not just AI that will drive NVIDIA's growth, either; the Internet of Things -- particularly self-driving cars -- and virtual reality are two more up-and-coming markets with nearly limitless potential, and the graphics-chip king is leading the charge. Toss in its industry-leading gaming GPUs, and NVIDIA is poised to continue its stellar run for years into the future.
Riding the cashless wave
Neha Chamaria (Visa): A savvy investor would look for three things in a growth stock: earnings upside, the balance between reinvested profits and dividends, and capital appreciation potential. A company that has grown leaps and bounds by plowing back a bigger chunk of profits into its business, instead of paying out as dividends, has strong chances of outperforming the market in the future -- especially if it's unlocking value from an emerging trend. Credit card behemoth Visa is a perfect example.
Look at how rapidly Visa's profits, free cash flow, and share price have grown in the past decade:
The spectacular sixfold jump in Visa's shares since 2007 was backed by rising profits, which is what makes it such an incredible growth stock. A key driver of Visa's growth has been its tiny dividend payout; even after increasing its dividends annually for at least the past ten years, Visa currently pays out less than a quarter of its profits in dividends. It deploys remaining profits and cash back into the business or uses them to repurchase shares, which looks like a smart strategy if the chart above is anything to go by.
With the world increasingly adopting plastic money, Visa is unlikely to face a growth hurdle anytime soon. Management is already anticipating a solid year ahead with double-digit growth in revenue and earnings, and analysts foresee Visa's EPS rising 17% in the next five years. I see slim chances of this growth stock disappointing you in the long run.
An opportunity in gridlock
Rich Duprey (DaVita): DaVita and Fresenius Medical Care control about 70% of the dialysis market in the U.S. They may have suffered in recent weeks at the thought the Republican-controlled House of Representatives and Senate would actually replace, if not outright repeal, the Affordable Care Act. Yet Washington being what it is, the effort went down in flames.
Some 88% of DaVita's patients are covered under some form of government-based program, with about three-quarters of its dialysis patients on Medicare and Medicare-assigned plans, but government programs reimburse DaVita at much lower rates than private insurance does, limiting its pricing power. According to Bloomberg, DaVita generated 95% of its EBITDA (earnings before interest, taxes, depreciation, and amortization) from patients with private insurance between 2013 and 2016.
Last year the Centers for Medicare & Medicaid Services began investigating companies that helped shift patients to the better-paying private plans offered on the ACA individual markets, even though those patients were eligible for government health-insurance programs. Congress, though, is looking to make it easier for dialysis companies to steer patients to private plans, which can also be more flexible for patients; however, the so-called Trumpcare replacement for the ACA might end up allowing insurance companies to raise patient premiums to price them out of the market. The multiple moving parts of this battle have weighed on the stocks of the dialysis centers.
DaVita, however, has entered the international dialysis market, and a large portion of its clinic growth is likely to occur in foreign markets. Going overseas helps it diversify its operations and provide new revenue streams. That may not amount to much at first -- the company had just 154 dialysis centers in 11 countries at the end of last year. But last quarter it saw revenues grow 9% sequentially and 37% year over year; this suggests that its stock, which trades at eight times the free cash flow it generates, will be an opportunity for savvy investors to take advantage of.
Neha Chamaria has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia and Visa. The Motley Fool owns shares of DaVita. The Motley Fool has a disclosure policy.