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Wall Street Has Given Up on These 3 Stocks, and That's a Huge Mistake

By Todd Campbell, Rich Smith, and Neha Chamaria – Updated May 30, 2018 at 3:47PM

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These stocks have been beaten-up, but that could be creating an opportunity for investors.

There isn't much love for Owens Corning (OC 0.51%)Camping World Holdings (CWH 2.59%), and Oceaneering International (OII -1.73%) on Wall Street right now, but that could be about to change. Some of our top Motley Fool contributors think the tough times that have soured the mood of institutional investors on these stocks could be ending, and that could make these stocks bargains worth buying. 

Is it time to add these beaten-up stocks to your portfolio? Read on to learn more about the challenges facing these companies and the opportunity that could be ahead for investors.

A man in a suit covers his eyes. Drawings of light bulbs float around his head.

Image source: Getty Images.

Ignore the noise and pay attention to this stock

Neha Chamaria (Owens Corning): Owens Corning shares have dropped nearly 30% so far this year, and despite the building materials company delivering on its numbers, Wall Street just doesn't seem impressed. It's time the market tones down its expectations and gives credit where it's due.

You see, Owens Corning shares were already under a bit of pressure when its first-quarter earnings failed to strike a chord with investors after the company missed analysts' estimates by a substantial margin. The company's revenue grew strongly at 14% year over year, yet rising input costs dented its bottom line. It's an industrywide concern and not really Owens Corning-specific. Owens Corning sells to the construction industry in three segments: composites, insulation, and roofing.

As for the housing market, new home sales appear to have lost steam lately, but it's not an inventory glut. On the contrary, tight supply has sent home prices soaring in recent months. That, combined with higher mortgage rates, has made homes expensive and is hurting sales. Otherwise, even consumer confidence in housing hit record highs in April, so it's not that the housing market is cooling off to scare investors in housing-related stocks.

For its part, Owens Corning is increasing prices on some products to pass on higher costs to consumers, and expects to generate double-digit operating margins in each of its three business segments -- composites (mainly fiberglass), insulation, and roofing -- in fiscal 2018. What I like most about Owens Corning is that it consistently generates greater free cash flow than net income, which is a sign of management efficiency. So for the trailing 12 months, the company's FCF was nearly twice its net income. With management targeting 10% growth in full-year revenue and 100% conversion of earnings to FCF, investors may want to ignore Wall Streets' pessimism.

Can this RV roadkill get back on track?

Rich Smith (Camping World Holdings): If you're looking to pick up a stock that Wall Street has given up for dead, look no further than Camping World Holdings, the retailer, insurer, and financier of all things recreational vehicle (aka "RV").

How bad have things gotten for Camping World Holdings? Well, the stock is down 57% since the year began -- that's your first clue. The stock was also featured in a Wall Street Journal article last week on how "the wheels came off" the entire RV industry this year -- that's your second.

Worries about steel and aluminum tariffs are to blame for some of investors' negativity about RV stocks. Higher gas prices and rising interest rates aren't helping much either. And as the Journal points out, the RV industry as a whole has a "history of spectacular booms and busts" that investors may be leery of. Topping it all off, earlier this month, Camping World Holdings suffered its latest sell-off when the company reported a tiny earnings miss -- in a quarter that saw sales surge 20% and pro forma profits up 16.5%.

It takes a brave investor to invest in the face of headwinds like these. Still, management reassures investors that "backdrop across the RV industry remains strong," and reaffirmed its guidance for full-year sales of between $4.8 billion to $5.0 billion, in line with estimates. Analysts forecast a further 10% growth in sales next year, alongside 27% growth in profits. If Camping World can deliver on these expectations, and resume generating positive free cash flow, this left-for-dead stock could still come back as a winner.

An offshore rig on a sunny day.

Image source: Getty Images.

Offshore woes could be over

Todd Campbell (Oceaneering International): A whopping 17 out of 22 Wall Street analysts that follow Oceaneering International rate it a hold or worse and given Wall Street's reluctance to issue negative ratings, that's a pretty pessimistic view of this offshore energy services company.

You can't really blame them for being unimpressed by the company. Since peaking near $85 per share in 2014, its shares have plummeted to about $22 because lower oil prices have crimped offshore oil and gas exploration.

However, a turn could be coming in that market and if so, Wall Street could get caught flat-footed and needing to catch up.

Oceaneering International's financials are driven largely by its remotely operated vehicles (ROV) and subsea products, and demand for those solutions depends on rising -- not falling -- offshore investment by oil and gas companies.

Offshore projects are historically more expensive than land-based projects, so it's no surprise that those projects were the first to be moth-balled by exploration and production companies. Crude oil prices are rebounding, though, and advances in technology that are making offshore projects more competitive could spark interest again.

For example, ExxonMobil is spending big money offshore Guyana on a massive 6.6 million acre project and while BP's capital spending budget isn't growing yet, it's also got important projects offshore Egypt, Azerbaijan, and in the North Sea (Clair Ridge). A ramp in offshore activity by BP would be particularly good news for Oceaneering Int'l because BP is its biggest customer, accounting for 12% of revenue in 2017.

Oceaneering Int'l's sales aren't reboounding yet, but utilization of its ROV fleet and orders for its subsea products could be bottoming. For the full year, the company's guiding for fleet utilization to improve from 44% to the low 50% range, and by the end of this year, management thinks the book-to-bill ratio for its subsea products will climb back above one from 0.71 in Q1.

Admittedly, I don't expect a quick pricing and profit recovery because of these developments, but I do believe this year could be the turning point for the company and if I'm right, then Wall Street's wrong to be so bearish.

 

Neha Chamaria has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. Todd Campbell owns shares of Oceaneering International. His clients may have positions in the companies mentioned. The Motley Fool recommends Camping World Holdings and Oceaneering International. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Owens Corning Stock Quote
Owens Corning
OC
$78.61 (0.51%) $0.40
Oceaneering International, Inc. Stock Quote
Oceaneering International, Inc.
OII
$7.96 (-1.73%) $0.14
Camping World Holdings, Inc. Stock Quote
Camping World Holdings, Inc.
CWH
$25.32 (2.59%) $0.64

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