Scores of companies generate huge returns for their investors without making splashy financial headlines. That's why it can make a great deal of sense to look for stocks to buy that Wall Street is currently ignoring.
So, which stocks are potential hidden winners that can be safely purchased today? We asked a team of investors to weigh in, and they picked Sogou (NYSE:SOGO), TJX Companies (NYSE:TJX), and Mitek Systems (NASDAQ:MITK).
An underdog search engine in China
Leo Sun (Sogou): Sogou controls about 4% of the online search market in China, according to StatCounter, making it the country's fourth-largest search engine after Baidu, Alibaba's Shenma, and Qihoo 360's Haosou -- in that order. Sogou claims, based on iResearch's numbers, that it's the "second largest search engine by mobile queries in China" with a market share of 17% last year.
Sohu, one of China's oldest internet companies, spun off Sogou in an IPO last November. Sohu retains the largest stake in Sogou, followed by Tencent. Tencent owns WeChat, the top mobile messaging app in China with nearly a billion monthly active users worldwide.
On its own, Sogou seems like a weak investment. But with its integration into WeChat's ecosystem and Tencent's QQ browser (which controls 11% of China's mobile browser market), Sogou might stand a chance against Baidu.
Sogou currently trades about 35% below its IPO price of $13 per share, due to concerns about its sales growth, tough competition, and trade tensions with China. Yet only four analysts currently follow Sogou. On average, those analysts expect Sogou's revenue and earnings to grow 37% and 35%, respectively, this year.
Those are robust growth figures for a stock that trades at 22 times forward earnings. By comparison, Baidu trades at 25 times forward earnings, and analysts expect its revenue to rise just 17% this year as its earnings slip 7% on higher investments. Therefore, Sogou might be a hidden gem in China's crowded tech sector.
Discounts are always good
Demitri Kalogeropoulos (TJX Companies): The retailing industry isn't a Wall Street favorite these days, but that's no reason for investors to avoid TJX Companies' stock. In fact, between healthy operating growth and increasing cash returns, there's a lot to like about this off-price specialist.
Its 2017 fiscal year included more of the same steady, positive momentum that investors are used to seeing from this high-performing business. Comparable-store sales increased 2% to mark a slowdown from the prior year's 5% spike. But TJX Companies enjoyed healthy customer traffic across its retailing brands as profitability held steady at 28% of sales. In a testament to its flexible operating model, 2017 was the 22nd consecutive year of rising sales at existing locations.
It benefits from industry upheaval and consolidation, and that fact supports management's forecast for another year of modest growth ahead. And, as its recent 25% dividend hike demonstrates, investors can expect any operating gains to be supplemented by gushing cash returns.
A strong inventory position should help TJX Companies boost profitability in 2018 so that earnings rise by about 5% to $4.04 per share. Tax law changes have freed up cash, too, which executives aim to use to double stock buyback spending this year. Investors can follow that lead and pick up shares of this healthy business that's stuck in an unloved industry.
A backdoor play on mobile banking
Brian Feroldi (Mitek Systems): Big fund managers have so much capital to deploy that it isn't worth their time to research or invest in sub-$1 billion companies. However, individual investors have no such restriction, which is why it makes sense for them to focus at least a portion of their portfolios on small-caps that Wall Street can't touch.
One small-cap company that has caught my eye recently is Mitek Systems. With a market cap of about $280 million, this company is way too small to attract the attention of the big boys. However, the company is growing very rapidly, and I think it's poised to deliver great returns for patient shareholders.
So, what does Mitek Systems do? Put simply, the company focuses on mobile image capture and identity verification software. Mitek's software is currently used by more than 6,100 financial institutions (think banks, credit unions, payment processors, and insurers), and it has been used by more than 80 million customers. The product it's best known for is Mobile Deposit, which lets banking customers use the camera on their phone to deposit a check. This feature has become hugely popular with banking customers as Mitek's software has already been used to process more than 2 billion checks since it was first created.
Mitek's first-mover advantage in Mobile Deposit has allowed its revenue growth to soar in recent years. Companywide sales have jumped 314% in the last five years alone. The gains have allowed profits and cash flow to soar as well.
Looking ahead, market watchers expect Mobile Deposit to continue to gain popularity with consumers, which should translate into continued sales and profits gains. The company is also rolling out new uses for its technology such as identity verification, which could also make Mitek a hidden way to play the rise of cybersecurity.
Overall, Mitek is profitable, growing fast, and sports a debt-free balance sheet. That makes it a great stock for investors to get to know before Wall Street catches on.