Hidden gems don't stay hidden for long on Wall Street, where technology makes it easy to find the highest growth companies within seconds. Nonetheless, some hidden gems still slip through the cracks and are overlooked by analysts.
We recently asked three of our Foolish investors to name some hidden gems, and they chose Huami (NYSE:HMI), Kulicke & Soffa (NASDAQ:KLIC), and Okta (NASDAQ:OKTA) as their under-the-radar picks.
The second largest wearables maker in the world
Leo Sun (Huami): Wearables maker Huami went public in early February at $11 per share, but it hasn't moved much since its market debut. Huami makes devices like the Mi Band fitness tracker and Amazfit smartwatch for its partner Xiaomi.
Huami controlled 14% of the global wearables market in 2017, according to IDC, making it the second largest player after Apple. Fitbit, the former market leader, ranked third.
Huami overtook Fitbit by selling comparable products at much lower prices. Robust demand for its products, especially in China, boosted its revenue by 74% in 2016 and another 37% in the first nine months of 2017.
Unlike Fitbit, Huami is also profitable. It reported a net profit of 23.9 million RMB ($3.6 million) in 2016, compared to a net loss in 2015. It also posted a net profit of 95.1 million RMB ($14.3 million) in the first nine months of 2017.
Huami's numbers look solid, but it's only profitable because Xiaomi shoulders the company's design, manufacturing, marketing, and distribution expenses. Xiaomi owns a 19.3% stake in Huami, while Xiaomi CEO Lei Jun's Shunwei Capital owns another 20.4%.
This relationship clearly benefits Huami, but the critics claim that Huami is essentially a Xiaomi subsidiary being run as a public company. They also note that if Xiaomi stops shouldering Huami's expenses -- which could happen if Xiaomi goes public -- it would immediately become unprofitable. Those are valid concerns, but Huami remains an interesting stock to watch.
Don't ignore this semiconductor stock
Tim Green (Kulicke & Soffa Industries): Only a few Wall Street analysts follow Kulicke & Soffa, a manufacturer of semiconductor packaging equipment. The company's products fulfill a key step in the semiconductor manufacturing process. Instead of selling a wide variety of equipment, like industry giant Applied Materials, Kulicke & Soffa focuses on a small portion of the overall market. I first discovered this stock a few years ago, and I remain a shareholder today.
The semiconductor equipment industry is cyclical, and Kulicke & Soffa's financial results can be volatile as demand swings up and down. But the company has been reasonably consistent over the past decade, only posting a loss in fiscal 2009, during the depths of the financial crisis. Analysts are expecting earnings of $2.23 per share this year, putting the PE ratio at about 11.3.
That valuation actually makes the stock look more expensive than it really is, because the company has a cash-rich balance sheet. If you back out the $633 million of net cash, the PE ratio falls to just 7.3. One thing to note: Because earnings can fluctuate, it may be better to look at average earnings over a period of time, rather than earnings in a single year. Using the 10-year average and backing out that net cash, Kulicke & Soffa sports a PE ratio closer to 17. That's not nearly as cheap, but it's still well below the S&P 500's valuation of 24.5 times trailing earnings.
Kulicke & Soffa stock isn't for everyone, given how much the company's results can fluctuate. But it's certainly worth a look.
A cloud stock flying under the radar
Jeremy Bowman (Okta): One stock that Wall Street only seems to just be learning about is the cloud-based identity specialist, Okta. The stock had its IPO less than a year ago, getting little attention, and has since been mostly ignored by the financial media.
Like other cloud stocks, Okta is benefiting from the increased adoption of cloud-based solutions like its Okta Identity Cloud, which allows users to scale up as necessary and add new tools as needed.
The company's leading position in identity for the enterprise, offering security solutions through tools like password management, has led to strong growth, with revenue increasing 59% in its most recent quarter. The young company seems to just be getting started: it has recently added customers like JetBlue and Nordstrom, and has expanded its relationship with several others as companies realize the benefit of Okta's products.
The subscription-based model and the way it is integrated platform into businesses IT infrastructure means that switching costs are high, giving the company an economic moat as customers are unlikely to leave once they begin using its products.
While Okta expects revenue growth to moderate next year, slowing to 33-35%, the long tail of growth ahead in cloud-computing as more companies move their IT systems over to the cloud should help the company deliver solid sales growth. Though Okta is currently operating at a loss, profits should eventually follow as the company builds an established customer base and reaps the growth of the cloud.
Jeremy Bowman owns shares of Apple and Okta. Leo Sun owns shares of Apple. Timothy Green owns shares of Kulicke & Soffa Industries. The Motley Fool owns shares of and recommends Apple, Fitbit, and Okta. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.