The 7 Most Undervalued Sleeper Stocks to Buy in February 2024
There will be investing buying Nvidia (NASDAQ:NVDA) even at current levels. However, after a big rally of 223% in the last 12 months, there might be a case for correction and consolidation. It’s not a great idea to pursue stocks that are trading at all-time highs. I would instead look at some quality undervalued sleeper stocks that are ready to skyrocket.
There are few thousand listed stocks. Ignored names do not imply that the business does not have potential. There are high-quality businesses that are trading at undervalued levels. When these ideas come to the limelight, investors can expect multi-bagger returns in quick time.
The focus of this column is on seven undervalued sleeper stocks that are likely to surge higher on solid business fundamentals. Let’s discuss the reasons that will act as catalysts for a rally in these stocks.
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Aker BP ASA (AKRBF)
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With rising geopolitical tensions and the possibility of expansionary monetary policies this year, I am bullish on oil. One stock that deserves a place in the portfolio is Aker BP ASA (OTCMKTS:AKRBF).
The Norwegian Continental Shelf focused oil and gas company is deeply undervalued and offers an attractive dividend yield of 8.71%. Considering the asset potential and balance sheet fundamentals, AKRBF stock is worth holding for the next five years.
As an overview, Aker BP has 2P reserves of 1.86 billion barrels of oil equivalent. Further, the company has 2C resources of 740 million barrels of oil equivalent. This provides clear visibility for production and cash flow growth in the coming years.
An important point to note is that the assets have a low break-even of approximately $35 to $40 per barrel. This paves way for robust free cash flows and healthy dividend growth. I must also add here that Aker reported a liquidity buffer of $6.8 billion as of Q3 2023.
With a low leverage ratio of 0.19, the company has high financial flexibility for aggressive exploration activities, this is one of the undervalued sleeper stocks to buy now.
Lundin Gold (LUGDF)
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Lundin Gold (OTCMKTS:LUGDF) stock is another name among undervalued sleeper stocks that worth considering.
Besides trading at attractive valuations, the gold miner also offers an attractive dividend yield of 3.41%. With the likelihood of gold trending higher, I am bullish on cash flow upside and healthy dividend growth.
Lundin Gold has an all-in-sustaining-cost below $900 an ounce. With gold trading above $2,000 an ounce, there is visibility for healthy EBITDA margin and cash flow upside.
For the first half of 2023, Lundin reported free cash flow of $120 million. It’s likely that annual FCF will be around $300 million this year with gold trending higher. Higher production guidance for 2025 and 2026 will further boost cash flows.
Scorpio Tankers (STNG)
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Scorpio Tankers (NYSE:STNG) looks massively undervalued at a forward price-earnings ratio of 6.5.
Additionally, the stock offers a healthy dividend yield of 2.11%. I expect high total returns from STNG stock over the next few years.
As an overview, Scorpio Tankers is engaged in the seaborne transportation of refined petroleum products. Currently, the company has a fleet of 111 product tankers with an average age of 11 years.
I believe that geopolitical tensions will ensure that tanker rates remain firm and Scorpio will continue to deliver healthy cash flows. Scorpio estimates that a $10,000 per day increase in day rate would translate into $350 million in incremental annualized cash flows. Factors like an ageing fleet and low order book are likely to support day rates.
It’s worth mentioning here that Scorpio has reduced debt by $1.4 billion in the last two years, making it one of the more attractive undervalued sleeper stocks. With no new vessels on order and healthy cash flows, there is scope for further improvement in credit metrics.
Leonardo DRS (DRS)
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Leonardo DRS (NASDAQ:DRS) stock has trended higher by 45% in the last 12 months. However, the under-the-radar stock remains undervalued considering the growth prospects.
Being an emerging player in the defense industry, Leonardo is worth holding in the core portfolio as geopolitical tensions escalate globally.
Last month, Leonardo DRS won a significant order worth $3 billion for U.S. Navy’s Columbia-Class submarine program. As of Q3 2023, Leonardo had an order backlog of $4.7 billion. With the backlog swelling, there is visibility for growth and cash flow upside.
The company was formed by the merger of Rada Electronic into Leonardo. The new entity continues to prioritize potential merger and acquisitions for growth. With a healthy balance sheet, the inorganic route can boost the growth outlook.
Recently, Leonardo launched “the Stretto family of high-precision lasers.” The company expects the next-generation system to bring benefits to “quantum information science, including computing, sensing, timing and networking.” With a focus on innovation, Leonardo is well positioned for creating value.
Arm Holdings (ARM)
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I wouldn’t say that Arm Holdings (NASDAQ:ARM) is deeply undervalued. With a big addressable market and healthy growth outlook, I am bullish on the stock for multi-bagger returns in the next five years.
Arm Holdings produces efficient CPU products and related technology.
For Q3 2023, Arm reported healthy revenue growth of 28% on a year-on-year basis to $806 million. It’s also worth noting that for the trailing-twelve-months, the company’s free cash flow was $860 million. Considering the growth momentum, FCF will be more than $1 billion this year. With high financial flexibility, Arm will be positioned to invest in innovation.
Pinterest (PINS)
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Back in February 2021, Pinterest (NYSE:PINS) stock was trading at highs of $90. A big correction followed and PINS stock traded around $20 levels for an extended period.
The correction was also associated with the markets ignoring the stock. However, PINS stock is back in action with a rally of 50% in the last six months. I believe that the stock remains attractively valued and is worth considering.
For Q3 2023, Pinterest reported 11% growth in revenue and 8% growth in monthly active users. However, the most important point is the company’s global average revenue per user was $1.61. The ARPU was $6.46 for U.S. and Canada, 91 cents for Europe, and 12 cents for the rest of the world.
There is ample scope for ARPU growth in Europe and emerging markets. I don’t expect emerging market ARPU to be anywhere near U.S. However, even if the ARPU doubles or triples from current levels, it’s likely to have a significant impact on EBITDA and free cash flows. Additionally, it’s encouraging to see growth in active users, which will contribute to revenue upside.
Transocean (RIG)
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With volatility in oil prices, Transocean (NYSE:RIG) stock has declined by 38% in the last six months. I believe that this is a good opportunity to buy this undervalued sleeper stock.
As an overview, Transocean is a provider of offshore drilling rigs to oil and gas companies globally. The company is focused on ultra-deep-water and harsh environment rigs.
The first positive to note is that Transocean had an order backlog of $9.4 billion as of December 2023. The backlog is front-end loaded and provides clear revenue and cash flow visibility for the next 18 to 24 months.
With the possibility of healthy free cash flows, Transocean is looking to deleverage. As credit metrics improve, the stock momentum is likely to turn positive.
I also believe that oil will trend higher in 2024 on the back of expansionary monetary policies. Firm oil prices will ensure that the order intake remains healthy this year. The deep correction therefore presents a good accumulation opportunity.
On the date of publication, Faisal Humayun 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.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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