Undervalued Gems: 7 Stocks Set to Outperform in the Coming Months

Cam White | July 8, 2024

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The S&P 500 has enjoyed a solid first half in 2024, propelled by the continued dominance of the largest technology companies. However, for the index to maintain its upward trajectory, a broader market rally is necessary. This begs the question: which stocks are poised to take center stage in the second half?

Barron’s has identified seven compelling contenders, excluding the established tech giants, that exhibit a confluence of positive factors: improving analyst sentiment, rising earnings estimates, and valuations that haven’t yet fully priced in their potential.

These under-the-radar names span diverse sectors: industrial giants 3M (MMM) and DuPont de Nemours (DD), airline carrier United Airlines (UAL), defense contractor Huntington Ingalls Industries (HII), mining leader Freeport-McMoRan (FCX), consumer finance powerhouse Synchrony Financial (SYF), and data center real estate investment trust Digital Realty Trust (DLR).

A significant shift in analyst sentiment is evident. Three months ago, the average “Buy” rating ratio (the number of “Buy” ratings compared to the total number of analyst ratings) for this group stood at 42%. Today, that figure has climbed to a much more bullish 60%, representing a net gain of 28 new “Buy” ratings. Notably, the S&P 500’s average “Buy” rating ratio sits at 56%, while the six mega-cap technology companies – Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), Amazon (AMZN), and Apple (AAPL) – boast a staggering average ratio of 86%. While Wall Street clearly remains enamored with the tech giants, this presents an opportunity for investors to explore undervalued alternatives.

This sentiment shift isn’t without justification. The big six tech stocks have delivered a remarkable average return of 49% year-to-date, dwarfing the S&P 500’s average return of a mere 6%. Interestingly, the chosen group of seven stocks has generated a more modest average return of 13%, even trailing the broader index’s performance. This is largely due to the S&P 500 being a market-capitalization weighted index, meaning the outsized gains of the tech giants disproportionately influence the overall return.

However, a closer look reveals a hidden gem. Analysts have grown considerably more optimistic about the earnings potential of these seven companies. Over the past three months, their average 2024 earnings estimates have increased by a robust 11%. This stands in stark contrast to the big six tech stocks, whose earnings estimates have risen a comparatively modest 5%, and the S&P 500 as a whole, which has seen negligible upward revisions to its 2024 earnings outlook.

While long-term earnings growth estimates for the group of seven average around 8%, similar to the S&P 500, they fall short of the big six’s projected 11% growth rate. However, this relative slowdown in growth is more than compensated for by their attractive valuations. These seven stocks trade at an average price-to-earnings ratio (P/E) of 15, significantly lower than the S&P 500’s average P/E of 22 and a fraction of the tech giants’ average P/E of 31.

Undoubtedly, the tech giants’ valuations remain high, and their dominance might continue. Analyst ratings suggest Wall Street is unlikely to abandon them in the near future. Nevertheless, diversification is paramount for any successful investment strategy. These seven stocks, with their improving fundamentals, rising analyst confidence, and attractive valuations, present a compelling opportunity for investors seeking to capitalize on potential outperformance in the second half of 2024.