No matter where the markets are, some stocks will always fly under Wall Street's radar. It could be a boring business that's gone unnoticed or a young company trying to find a footing in a promising industry. Or even a stalwart that's fallen out of favor because of near-term challenges.
Each of these situations -- and more like them -- could throw up great opportunities for long-term investors. Not one to miss them, we asked three Motley Fool contributors to hunt up an unappreciated stock that they believe deserves more love. They came up with some really interesting names, including Illinois Tool Works (ITW 1.43%), ShotSpotter (SSTI 4.49%), and Dynavax Technologies Corporation (DVAX 1.08%).
Give the market's views a break
Neha Chamaria (Illinois Tool Works): Macro concerns and a cautious outlook from several industrial companies last quarter have left investors jittery. Illinois Tool Works couldn't escape the market's ire, either, and saw its shares drop almost 15% so far this year, even hitting fresh 52-week lows last month before gaining some ground. At this point, I believe the industrials stalwart deserves Wall Street's attention.
For starters, the conglomerate's numbers last quarter were nowhere as dismal as the market made them out to be. Illinois Tool Works' second-quarter earnings grew 17% year over year, backed by 7% growth in revenue. The problem was that those numbers fell short of analysts' estimates.
Some of the company's end markets are facing growth hurdles, and rising raw-material costs are a concern. Yet Illinois Tool Works earned a respectable operating margin of 24% and generated $2.3 billion in free cash flow against net income of $1.88 billion in the past 12 months. The company still expects to grow earnings per share by 15% at the midpoint in fiscal 2018.
Long story short, Illinois Tool Works' earnings growth rate may slow down in the near term, but its long-term story remains intact. The stock's Dividend Aristocrat status and a strong 28% latest increase in dividend should further reinstate investor confidence in the company and its stock for the long term.
Shooting out the lights
Rich Duprey (ShotSpotter): Imagine owning the technology for an in-demand product while also having the market all to yourself. That's the position gunshot detection specialist ShotSpotter finds itself in, as it is the only company that offers wide-area gunshot location capabilities.
ShotSpotter is still small, with just under $24 million in annual sales, and it's not yet profitable, but it makes up for that with its growth potential. ShotSpotter had contracts with 77 public-safety customers last year, covering approximately 510 square miles in 88 cities across the U.S., including three of the country's 10 largest cities. It also had seven security customers covering eight college campuses.
ShotSpotter works by having its sensors pick up the sound of a gunshot and transmit a recorded file to a review center, where acoustics experts confirm whether the sound was gunfire. They can also tell whether there are multiple shooters or high-capacity weapons are being used. Alerts are then forwarded to law enforcement agencies, typically within 45 seconds of the incident.
Revenue surged 53% last year and is up by a like amount in 2018 as it signs on up more customers. ShotSpotter expects full-year revenue to more than double to as much $34 million, and it anticipates turning profitable by the fourth quarter.
With only a few dozen cities under its belt, ShotSpotter has plenty of room to grow, meaning investors have the opportunity to discover this company before Wall Street finds out first.
A fallen star
George Budwell (Dynavax Technologies): In 2017, Dynavax's shares rose like a rocket, gaining an eye-popping 373% for the year. This year, however, has been an entirely different story for the cancer immunotherapy and vaccine company. So far this year, for instance, Dynavax's shares have sunk by a whopping 35%, and they've only continued to head lower in recent sessions. What's behind Wall Street's abrupt change of heart?
Like most early commercial-stage biotechs, Dynavax is suffering from the harsh reality of bringing a promising new product to market. Specifically, the company is in the process of rolling out its next-generation hepatitis B vaccine, Heplisav-B.
While some analysts believe this more user-friendly vaccine will edge out current market-share leaders Engerix-B, from GlaxoSmithKline, and Recombivax HB, from Merck, this process won't happen overnight. The core problem is that Dynavax lacks the resources and infrastructure necessary to rapidly gain market share against two of the industry's biggest names.
On the bright side, Wall Street does believe Heplisav-B will gain significant ground starting in 2019. Analysts, for instance, currently have the vaccine's sales growing by over 500% next year, compared with 2018. And if Heplisav-B gains market share as expected, Dynavax's shares might be trading at only about 3 times the company's 2020 revenue. That's a bargain for a biotech with a major new product in hand and a fairly diverse pipeline that sports multiple high-value immuno-oncology product candidates.
Bottom line: Wall Street's decision to "sell the news" following Heplisav-B's commercial launch may turn out to be a stellar buying opportunity for bargain hunters with a long-term mindset.