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3 Top Stocks That Aren't on Wall Street's Radar

By Jon Quast - Apr 14, 2020 at 8:38AM

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Whether it's enabling corporate payments, manufacturing, or more efficient advertising, these three companies have what it takes to beat the market going forward.

Finding quality companies that aren't already on Wall Street's radar is challenging since investors tend to take notice of businesses doing extraordinary things. That said, under-the-radar candidates can sometimes be found behind the scenes. Three companies for your watch list include niche payments-network company WEX (WEX -1.79%), manufacturing enabler MKS Instruments (MKSI -7.00%), and identity software player LiveRamp Holdings (RAMP -1.10%).

All three of these companies are growing, and hardly anyone has noticed. That oversight could be your opportunity.

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Image source: Getty Images.

1. WEX: Offers a payments network for health benefits plans

Headquartered in Maine, WEX operates a payments network (like Visa and Mastercard) primarily used for corporate spending. It offers fuel cards and products for travel-related purchases under its two largest business segments. That being the case, it's not surprising to see the stock's still down over 50% from 52-week highs -- response to the coronavirus pandemic has reduced fuel demand, fuel prices, and corporate travel spend.

However, WEX has a third business segment that deserves investors' attention. WEX Health Cloud helps businesses administer their benefit plans, and it gives consumers a convenient platform to track expenses and pay health bills. For 2019, WEX's health and employee benefits segment's revenue grew 48% year over year to $317 million. 

Granted, most of the health segment's growth came via acquisitions. In the fourth quarter, the health segment's revenue grew 69%, but organic growth was just 18%. The rest came from the company's $425 million acquisition of Discovery Benefits. It was an important acquisition, giving WEX over 1 million new users across the U.S. That user growth is crucial for leveraging the largely fixed software cost, which will drive profitability.

WEX earned $2.26 per share by generally accepted accounting principles (GAAP) in 2019. That makes it's stock look quite pricey at around 50 times earnings. However, acquisitions alone affected earnings by $3.64 a share. Adjusting only for acquisition costs, Wex trades under 20 times trailing earnings.

This context coupled with its growth prospects once normal travel resumes are part of why I think WEX is undervalued today.

2. MKS Instruments: Diverse product lineup helps in a downturn

MKS Instruments may not be completely off Wall Street's radar: It's been on Fortune's 100 Fastest-Growing Companies list for three consecutive years. However, the company is likely misunderstood since it's often misrepresented as a pure-play in the semiconductor industry. But its products are used in a variety of industries, including the medical and scientific fields. In 2019, only 49% of revenue came from semiconductors. 

The diverse use cases for its products are part of why I believe MKS Instruments is one of the better companies in this space for investors. Unlike some companies, it's not over-concentrated in a single industry or customer. In 2019, its top 10 customers combined only accounted for 33% of total revenue.

MKS Instruments' diversification has come via acquisitions. In 2016, it acquired Newport Corp. for $980 million, and in 2019, it acquired Electro Scientific Industries for $1 billion. While management isn't afraid to make large purchases like this, it likes to pay debt back down in a timely manner. Despite these being recent acquisitions, MKS Instruments only sports $872 million in long-term debt on its balance sheet, with $415 million in cash and equivalents.

MKS Instruments is able to deleverage quickly thanks to strong free-cash-flow generation. Over the last four quarters, it's generated $181 million in free cash flow. It also uses this cash flow to reward shareholders, with a dividend that yields just under 1%. While it's a modest payout, MKS has raised the dividend in six of the last nine years.

3. LiveRamp: This SaaS is growing its recurring revenue stream

We're in the early innings of the big-data age, and one data-centric company for your consideration is identity marketing player LiveRamp. This software-as-a-service (SaaS) business aggregates data from multiple sources and connected devices, creating a more complete customer identity profile. This information allows for more targeted and effective advertising from LiveRamp's consumer-brands customers. 

Until recently, LiveRamp was just a small part of Acxiom Corp.'s business. But in 2018, the company sold off the Acxiom part of its business and went all-in on LiveRamp's software. That means this business is still taking shape, but the pivot looks to be paying off. LiveRamp's annual recurring revenue (ARR) is now $286 million, up 28% year over year. 

There's another trend worth watching, though. Since the fiscal fourth quarter of 2019, ARR is up 23%. Meanwhile, sales and marketing is only up 6% as LiveRamp's customer pipeline strengthens. ARR growth outpacing sales and marketing costs is a trend that, if it continues, puts LiveRamp squarely on the path to profitability. Indeed, in the third quarter, its operating loss improved by $14 million quarter over quarter to just a $5.5 million loss. And it was free-cash-flow positive.

Some investors may worry about LiveRamp's business in the near term. Its customers are businesses, and businesses are cutting back on advertising due to the COVID-19 pandemic. It's worth monitoring. However, LiveRamp's software increases the advertising success rate. Therefore, the current economic climate could be a net positive for this business, as LiveRamp can help make those precious ad dollars more effective.

Jon Quast owns shares of MKS Instruments. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.

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Stocks Mentioned

MKS Instruments, Inc. Stock Quote
MKS Instruments, Inc.
$108.90 (-7.00%) $-8.19
LiveRamp Holdings, Inc. Stock Quote
LiveRamp Holdings, Inc.
$22.44 (-1.10%) $0.25
WEX Inc. Stock Quote
WEX Inc.
$162.29 (-1.79%) $-2.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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