3 Unloved Stocks That Could Beat the S&P 500
Why would investors want to find the most hated stocks in America? Because weakness can translate into opportunity.
Investors can be a superstitious lot, employing their own patent-pending strategy for finding stocks that beat the market. The art is in finding unloved, underpriced stocks that have been kicked to the curb by irrational investors who have been erroneously influenced by either the talking heads on TV or the herd mentality of other investors.
There are a lot of great stocks out there that are hated by analysts and investors for many reasons. Some of those feelings may even be legitimate. But most investors I speak to don’t really do their own due diligence. They’re more willing to trust their money to the opinion of someone who doesn’t have an invested interest in their retirement.
If you want to buy low and sell high, you need to find stocks worth buying low that have excellent upside potential. The best way to find overlooked, unloved, and dare I say, hated stocks, is to seek out those with the most bearish outlook. That could mean searching out those stocks with the biggest short positions or even most analyst downgrades.
Obviously, correlation is not causation. So when looking for stocks with huge short positions; avoid those with terrible fundamentals, operations in a saturated market, and a terrible outlook. Instead, only consider hated stocks that have strong fundamentals and operations whose stock price is being hammered as a result of short-term issues out of its control.
A hated stock with garbage fundamentals and outlook will always be hated. An unjustly overlooked or ignored stock in an unloved sector has a great chance of coming back into favor.
Below are three of the top least-favorite stocks in America.
TransCanada Corporation (NYSE:TRP)
All you have to do is whisper “Keystone XL and Energy East” and investors run. TransCanada Corporation (NYSE:TRP), which owns the rights to build the Keystone XL and Energy East pipelines, is not really a darling of Wall Street or the White House. In fact, it’s one of the most hated stocks on Main Street.
Aside from fears over new pipelines, TransCanada’s share price is being hobbled by its exposure to the energy market and its valuation as a utility stock. Trading near $47.00 per share, TransCanada’s share price is down 22% year-to-date.
What does TransCanada have going for it? Aside from a 4.50% annual dividend yield which is pretty attractive, TransCanada has tremendous opportunities to grow. It has total assets of roughly $59.0 billion, 35,500 miles of gas pipelines and 368 billion cubic feet of gas storage. (Source: Transcanada.com, August 7, 2015.)
As a traditional utility, it has total power generation of more than 11,800 megawatts. This could allow TransCanada to grow at a better rate than most traditional utilities.
Transocean Ltd. (NYSE:RIG) is a leading international provider of offshore contract drilling services for energy companies. For starters, this means the company is operating in a beaten-down sector. That might explain why 29.6% of its shares are sold short.
With oil prices so low and oil and gas companies cutting their capital spending, it’s pretty hard to justify the high cost of development. As a result, demand for Transocean’s rigs is weak. And this is reflected in the company’s share price. Currently trading near $14.00 per share, Transocean’s share price has fallen 60% over the last year and 20% since the beginning of January.
In April, Transocean named Jeremy D. Thigpen as its new President and Chief Executive Officer. While investors are hopeful he can help turn things around, chances are, the company’s share price will continue to struggle in the near term. (Source: Transocean.com, August 7, 2015.)
Everyone has turned their back on precious metals. Maybe a little too much. 11.62 million Goldcorp Inc. (NYSE:GG) shares are sold short. Goldcorp is a great company with strong fundamentals and a strong cash position. One that could help it take advantage of other gold companies flailing in the current environment.
On July 30th, Goldcorp reported record second-quarter gold production of 908,000 ounces, compared to 648,700 ounces for the second quarter of 2014. It also reported net earnings of $392 million, or $0.47 per share compared to net earnings of $181 million, or $0.22 per share, for the second quarter of 2014. All-in sustaining costs were $846.00 per ounce of gold in the second quarter of 2015 compared to $852.00 per ounce in the second quarter of 2014.
Goldcorp also announced that it was reducing its dividend per share 60% from $0.05 to $0.02 effective August 1. This makes sense when you consider the state of precious metals. Also, the company had second-quarter free cash flow of $174 million before dividends; $50.0 million after dividends. More money could mean more acquisitions.