Buy low and sell high – it’s an old saw, true, but it’s still the surest way to turn a profit in the markets. The hard part, of course, is knowing just what to buy when it’s low. Not all low-cost stocks are created equal, and a savvy investor needs to know how to sort out the potential winners for his portfolio.
Here, we look at three stocks have taken a beating in recent months but retain their Buy rating. The reasons vary, as do the industries and business models, but all three have three features in common: an entry cost below $15 per share, a low-end price target well above the current share price, and a huge upside potential.
Let's take a closer look:
Carbonite, Inc. (CARB)
The cloud backup company took two hard hits at the end of last month, when it reduced full-year revenue and earnings guidance the same week that CEO Mohamad Ali announced his pending departure. Investors generally don’t like getting reams of bad news all at once, and CARB shares fell from $23.90 to $18.01. The stock has been slipping slowing ever since, and currently stands at $14.48.
There was good news, however. Q2 GAAP revenues jumped to $121.5 million, a gain of 56%, and the adjusted EPS of 56 cents was 16% higher than the 47-cent expectation. Gross margins improved, too, from 77.1% in the year-ago quarter to 82.3% in Q2 2019.
While the CEO has left, his place has been taken on an interim basis by Board chairman Steve Munford. In a statement on the company’s path forward, Munford said, "We remain committed to capitalizing on the opportunity of combining data protection and security, while we improve the effectiveness of our go-to-market efforts and deliver on our profitability targets." It’s a good note of continuity, which investors like.
Some of Wall Street’s top analysts also like what they see in Carbonite, although they are cautious enough to lower their price targets. Northland Capital Markets’ Tim Klasell, a 5-star analyst, says, “We are reducing our top line in response [to Q2 revenue numbers], but cost synergies from the Webroot acquisition are protecting the bottom line. The CEO has left for a new opportunity, which raises the possibility of a strategic move.” With the company’s bottom line safe for now, and the way open for new ideas at the top, Klasell gives CARB a Buy rating with a $30 price target, suggesting a 107% upside from current levels. (To watch Klasell's track record, click here)
John DiFucci, of Jefferies, is more cautious but still bullish. He has lowered his price target from $37 to $29, but still sees a 100% upside to the stock. He describes Carbonite as “Consistently Inconsistent,” but adds that, “the stick will work if the company can hit numbers and the post-earnings selloff brings an attractive valuation.” DiFucci is also a 5-star analyst, and rated #27 overall in the TipRanks database.
Carbonite’s analyst consensus is a Moderate Buy, based on 5 buys, 2 holds, and 1 sell. The average price target of $26.75 gives an upside potential of 84% from the current share price of $14.48.
Kala Pharmaceuticals, Inc. (KALA)
Our next example of an undervalued stock with great potential is KALA. A small-cap pharma company, Kala Pharmaceuticals released its first drug – Inveltys, an eye drop to relieve pain and swelling after ocular surgery – to the markets early this year, and analysts expect its annual sales will peak near $300 million. Not bad, for a company with a market cap of just $136 million.
So why has KALA’s share price dropped 71% in the past 12 months, from its peak at $13.87 last August to just $4 at Friday’s close?
The answer may lie in the nature of biopharma investing, and the heightened expectations around the sales of new drugs. Inveltys’ slow start in the market is hardly out of the ordinary; medical research and drug development are capital intensive, and it generally takes several quarters before a new pharmaceutical begins to turn a profit. The investors are not worried about Kala’s red ink, so much as they are worried by the disparity between the $2.06 million in Q2 Inveltys revenue and the $2.69 million of the average estimate. Going forward, profit estimates grow, reaching $14 million for full-year 2019 and over $70 million for 2020. By the early indications, Inveltys will have difficulty meeting those numbers.
On the other hand, prescription numbers are moving in the right direction. Kala disclosed 11,000 Inveltys scrips in Q1, and 31,000 in Q2. The June quarter ended with Inveltys holding 6.8% market share in a crowded environment. More importantly, insurance plans covering a total of 92 million people have added Inveltys to their benefits lists.
Several Wall Street analysts see Kala’s growth potential outweighing its near-term risk. Speaking for the bulls, H. C. Wainwright’s Yi Chen says, “In our view, INVELTYS still has plenty of room for growth within the market of 4.8M cataract surgery procedures each year in the U.S. However, we have lowered the growth rate for INVELTYS revenue to reflect current market conditions given the entry of new competitors into the marketplace.” He may be cautious, but his price target and upside reflect the profit potential of the biopharma industry; at $12, the target suggests a 200% upside. (To watch Chen's track record, click here)
Wedbush analyst Liana Moussatos agrees with Chen about KALA’s potential, and then some. Writing, “We reiterate our OUTPERFORM rating,” she sets a 12-month price target of $51, implying a whopping 1,175% upside to the shares.
Despite KALA’s near-term risk, the stock holds a unanimous Strong Buy on the analyst consensus, with 3 buy ratings given in the last two weeks. Shares are selling for a low $4, but the average price target of $24 suggests an upside potential of 500%. It’s an indication of the high profits possible in the biotech industry.
Superior Industries International, Inc. (SUP)
Our third stock today may surprise you – it’s an industrial company, part of the supply chain for Detroit’s auto industry.
The Motor City may not be what it once was, but it’s hardly down and out, and whether they go electric, alt fuel, or stick with gasoline, cars are always going to need wheels.
That’s where Superior comes in. SUP is the leading manufacturer and supplier of cast aluminum wheels to the auto makers. Slowing net sales have led to declines in year-over-year income, however, and the company is facing a rough time. On the positive side, SUP showed a strong positive cash flow in Q2, and paid down $26.1 million in debt principal.
CEO Majdi Abulaban said, of Q2, “In light of the persistent volume weakness, we are taking action to right size costs... As a result of these actions, we have reduced production schedules in certain facilities and realized an improvement in working capital and cash flow, which supported sizeable debt principal reductions in the second quarter… We are confident that the initiatives we are implementing, including reducing capital expenditures, will further enhance cash generation for continued debt paydown in 2019.”
Watching from Wall Street, B. Riley FBR analyst Christopher Van Horn agrees that SUP has an upbeat outlook going forward. He writes, “We recognize that the company is exposed to production decreases in both North America and Europe. However, our thesis revolves around the company’s ability to manage a difficult top- line environment through better execution on the operating line. We are maintaining our Buy recommendation given that we think the company can improve their sales mix as program launches this year are likely on larger SUVs with higher priced wheels.”
Van Horn gives SUB shares a $9 price target to go along with his buy rating, indicating confidence in a high 287% upside to the stock. (To watch Van Horn's track record, click here)
Overall, SUP maintains a Moderate Buy from the analyst consensus, based on 2 buys assigned in the last 10 days. The stock sells for only $2.32, so the average price target, $8, suggests a potential upside of 244%.