For individual investors, it's important to know what Wall Street thinks about your stocks. Analysts at the big banks and research firms can often determine the direction of individual stocks with their buy and sell ratings and price targets as stocks tend to react when a well-regarded bank like Goldman Sachs changes its rating.
However, understanding Wall Street's blind spots also presents an opportunity for retail investors. The experts tend to focus too much on the short term, obsessing over quarterly earnings rather than the big picture. Other times, Wall Street gives up on a stock early only to see that sleeper turn into a big winner. Keep reading to see why our Motley Fool investors think Cleveland-Cliffs, Inc. (NYSE:CLF), Loma Negra (NYSE:LOMA), and SodaStream International (NASDAQ:SODA) may be just these kinds of stocks with big potential.
Can't see past its poor history
Tyler Crowe (Cleveland-Cliffs): For better or worse, we tend to view companies through a lens of what they have done in the past as a way to assess their future. That can be helpful at times when a company's management has a great or awful track record of capital allocation, but it can also be detrimental when looking at companies that have made wholesale changes to the business. Cleveland-Cliffs is very much in the latter category, and it looks like Wall Street isn't paying attention to the ways its new management team has changed this iron ore miner for the better.
During the Chinese commodity boom from the early aughts to around 2011, Cleveland-Cliffs' previous management team made several costly acquisitions that proved to be awful investments that bloated the balance sheet and were unprofitable the moment commodity prices started to decline. The situation was so bad that in late 2015 there were legitimate concerns about a potential bankruptcy.
Since then, that leadership team was fired and now-CEO Lourenco Goncalves was installed to clean up the mess. He has since jettisoned all of its unprofitable businesses to focus again on high-quality iron ore pellets mined and refined in the U.S., cleaned up the balance sheet, and is now back to growing the business with investments in new U.S. mines and upgrading facilities.
Despite the much-improved prospects for the company, Wall Street still seems to be concerned with the past performance of the company as it currently trades at eight times earnings. At that price and with the expected increase in profitability from its new mining and upgrading facilities, it really looks like this one is flying under Wall Street's radar.
Wall Street is fearful, and it's time to get greedy
Rich Smith (Loma Negra): It's been a good month since I picked Loma Negra Compania Industrial Argentina as my top stock to buy in June -- but it's been a bad month for investors who followed my advice. (Sorry about that.)
Shares of the Argentinean cement maker are down 19% over the past month -- and down a whopping 52% year to date. But while this news is painful, it may hold a silver lining: Given how completely Loma Negra has collapsed under the weight of Argentina's currency devaluation, it's clear that Wall Street has given up on this stock.
I think that's a huge mistake.
Don't get me wrong: Investing in Loma Negra is going to be challenging. Argentinean devaluation has investors running scared, and class action law firms are also swarming Loma with allegations that it's hiding "alleged violations of federal securities laws" in the U.S. and guilty of "alleged cartelization of the cement industry." But devaluation lowers Loma's cost of doing business within Argentina, and management denies the allegations against it. Assuming management is telling the truth, it follows that the stock will eventually bounce back, and rise to its intrinsic value, when the rumors prove false.
At less than 18 times free cash flow and less than 16 times earnings, with minimal net debt on its balance sheet, Loma shares look bargain-priced for the doubling in profits the company is expected to enjoy over the next two years. Morgan Stanley is on record as predicting the stock will more than double to $26 a share within a year -- and I agree.
A forgotten growth stock
Jeremy Bowman (SodaStream International): In its early days on the market at the beginning of this decade, SodaStream attracted a lot of attention from Wall Street. The do-it-yourself soda company looked set to disrupt the massive beverage market as it entered the U.S. by regularly posting quarterly revenue growth of better than 40%. The stock quickly doubled out of the gate, but a few the years later, the music stopped on SodaStream's run as the countertop beverage maker botched the 2013 holiday season, and a product that critics had accused of being a fad seemed to be just that as revenue growth turned negative for several quarters.
However, while the stock crashed and the market moved on, SodaStream regrouped. It moved into a more efficient production facility in Israel and rebranded itself as a sparkling water company, tying itself to a growth category rather than soda, which is seeing consumption decline.
That pivot has been overwhelmingly successful as the stock has jumped 450% since the beginning of 2016, though Wall Street has barely noticed. According to Yahoo! Finance, only four analysts still cover the stock. By comparison, larger companies have 20 or even 30 analysts following them. Meanwhile, SodaStream has regularly surged past analyst estimates in recent years, and the stock should have more room to run as it trades at a modest P/E ratio of 26 and its razor/blade model should ensure that profits grow faster than revenue. With its second-quarter earnings report due out at the end of the month, the stock could be poised for another pop.
Jeremy Bowman owns shares of SodaStream. Rich Smith has no position in any of the stocks mentioned. Tyler Crowe owns shares of Cleveland-Cliffs. The Motley Fool owns shares of SodaStream. The Motley Fool has a disclosure policy.