3 Under-the-Radar Stocks Peter Lynch Would Love
One of the greatest money managers of all time, Peter Lynch took Fidelity Magellan from $20 million in assets under management (AUM) in 1977 to $14 billion AUM in 1990 when he retired. That’s a better than 29% annual average return over that period. For context, that’s like investing $10,000 in a stock and turning it into $280,000 13 years later.
Lynch wrote two of the greatest value investing books, “One Up on Wall Street” and “Beating the Street.” They distill his investment process into understandable language that any investor can use to, well, beat the Street.
It was Lynch who also coined the term “tenbagger” to describe a stock that generated returns 10 times larger than the original investment. A proponent of buying what you know, one of Lynch’s favorite ways for discovering these big homerun stocks was to look for easy-to-understand, under-the-radar companies. He suggested looking for businesses “that any idiot can run – because sooner or later any idiot probably is going to be running it.”
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I won’t say the following three stocks are “idiot stocks,” but these Peter Lynch stocks are flying below Wall Street’s radar. Buying now before the smart money discovers them gives you the chance to enjoy tenbagger returns down the road.
Clearway Energy (CWEN)
Source: Pavel Kapysh / Shutterstock.com
Market conditions are moving in Clearway Energy’s (NYSE:CWEN) direction. The clean energy developer and operator is one of the largest producers of renewable energy in the U.S., with a portfolio of over 5,500 net megawatts (MW) of installed wind and solar assets. It has an additional 2,500 net MW of natural gas-fired generation facilities.
Clearway’s strategy is to own and operate assets that provide predictable, long-term cash flows. It uses that revenue stream to increase the dividends it pays to shareholders. Clearway has raised its payout for 14 consecutive quarters and maintains it has great insight into how to expand cash flows and grow its distribution.
The renewable energy company says it generates some $100 million of excess cash that can be deployed toward investments in the business. It also increased its revolving loan size from $495 million to $700 million. That gives it the ability to grow operations without accessing capital markets.
Clearway trades at 16 times earnings estimates and a deeply discounted 5x free cash flow (FCF). The dividend yields 6.2% annually. While the stock was pummeled this year due to rising interest rates, the Federal Reserve indicated it was pausing further action. The renewables stock is up 39% from its October lows as a result. Because it has good visibility into future earnings and dividend growth it could generate substantial returns for investors as it expands into an industry leadership position.
PGT Innovations (PGTI)
Source: Shutterstock
Window and door manufacturer PGT Innovations (NYSE:PGTI) specializes in components that can withstand debris impacts from hurricanes. It mainly markets its products in the Florida market and along the Gulf Coast. Although the housing market looks dicey, Florida and the South remain top destinations for homebuyers.
Rival Miter Brands sought to buy out the business in October for $1.9 billion or $33 per share. The offer was rejected as undervaluing the business and PGT stock trades over $33 today. Despite surging 95% year-to-date shares go for just 14 times earnings estimates and a discounted 16x FCF.
That rapid rise in value is no fluke. PGT Innovations has a long history of capital appreciation. Over the past 15 years, the window and door maker stock is up over 2,459% compared to a 220% gain by the S&P 500. Since 2013, revenue and earnings more than tripled. It forecasts as much as 20% growth in adjusted EBITDA in the fourth quarter as it delivers on “strong operational execution.” PGTI stock should keep building a fantastic growth track record for investors in the future.
ACM Research (ACMR)
Source: Pavel Kapysh / Shutterstock.com
Look for semiconductor equipment manufacturer ACM Research (NASDAQ:ACMR) to deliver the goods on growth in favorable industry trends. It provides the chip industry with cleaning equipment that helps improve yields. Third-quarter revenue jumped 26% on increased sales of single-wafer cleaning equipment alongside other technologies. Gross profit margins jumped 320 basis points to 52.5%, well ahead of ACM’s long-term target rate of 40% to 45%.
On the surface, it is a risky bet. It derives almost all of its sales from China, and the Biden administration recently imposed export control restrictions on chips and equipment to China. However, ACM Research is a Chinese-based company with offices in the U.S. It is looking to gain market share from Chinese chip stocks needing specialized equipment and looking for domestic suppliers. Several major manufacturers placed large orders for delivery in early 2024.
I tend to be leery of recommending Chinese stocks. The capriciousness of Beijing’s regulations can cause businesses to screech to a halt. Yet with China seeking to bolster its chip industry, ACM Research seems to have the inside track on long-term growth. The clean equipment maker is also looking to expand further into other foreign markets such as Europe and select Asian markets including Korea. It purchased land in Korea and ACM believes it will be able to supply U.S. customers from there. It also has a factory in Oregon.
The specialized nature of its equipment will be necessary as chip companies face secular growth trends. That should push ACMR stock to new heights in the future.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
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