With 2023 being largely about the usual suspects, investors may be better served in the new year targeting under-rated stocks. We’re talking about fundamentally undervalued or underappreciated ideas that really didn’t much airtime compared to their peers. However, with a fresh calendar ahead of us, circumstances could change favorably.
Mostly, the bullishness toward overlooked stocks centers on shifting fundamentals. It’s too early to call but the Federal Reserve has hinted at the possibility of interest rate cuts this year. If so, that would represent a massive paradigm shift compared to the hawkish monetary policies of 2022 and 2023. Therefore, investors should also adjust their expectations.
On another point, last year’s winners aren’t guaranteed to deliver the same results this year. For example, seemingly everybody was talking about semiconductor giant Nvidia (NASDAQ:NVDA) in 2023. It gained 246% for the year. However, in the trailing six months, NVDA only moved up less than 17%.
So, this might be a time to give the below hidden gem stocks a chance.
Let’s be real – Allstate (NYSE:ALL) is boring as you-know-what. An insurance specialist, ALL managed to gain a blistering 2.4% in 2023. Yeah, don’t knock us over with your robust performance. However, the upcoming fundamentals in 2024 and beyond may shine favorably for Allstate. It’s probably not going to a portfolio monster. However, it should keep the sticks moving.
Fundamentally, the insurance industry should benefit from lower interest rates. Basically, insurance companies pad their total return with diverse portfolio holdings. In particular, these entities love buying government bonds. If borrowing costs decline, the bonds that Allstate and its ilk hold would be worth more because the yield would be fixed at a higher rate compared to newly issued bonds.
Further, lower interest rates may increase risk-on sentiment across the board. If so, demand for more insurance products may likewise rise. Currently, Allstate posts an outstanding three-year revenue growth rate of 14.2%, yet it trades at a lowly 0.66X trailing-year revenue.
Stated differently, ALL is on a discount that few seem to appreciate. Thus, it’s one of the under-rated stocks to buy.
Murphy Oil (MUR)
Headquartered in Houston, Texas, Murphy Oil (NYSE:MUR) engages in hydrocarbon exploration. In other words, it features relevancies in the upstream component of the energy value chain. However, the underlying market didn’t perform so well last year. In part, economic concerns weighed on the sector despite oil-producing nations artificially introducing production cuts.
However, if the mighty Fed decides to lower borrowing costs, the oil market would likely rise. Basically, lower rates would devalue the dollar relative to other currencies. And since commodities – including hydrocarbon energy resources – are priced in dollars, oil should rise. That could benefit MUR as one of the under-rated stocks to buy.
Also, while electric vehicles pose downwind competitive concerns for Murphy and its ilk, a mass-scale transition won’t occur overnight. Let’s not forget that people are still hurting from various headwinds in the past few years. However, these headwinds may fade, which means that MUR – presently trading at 9.11X trailing-year earnings – may be a discount.
United Microelectronics (UMC)
Based in Taiwan, United Microelectronics (NYSE:UMC) is a semiconductor foundry. That means United doesn’t design its own chips but instead manufacturers chips designed by other companies. It’s effectively a “contract manufacturer” and thus plays an important role in the global semiconductor value chain. Still, UMC only gained 28% in 2023, which is modest compared to many other chip plays.
However, circumstances could change favorably for United, making UMC one of the overlooked stocks. According to the company’s website, United plays an important role in the rollout of 5G infrastructure. Per Moror Intelligence, this sector reached a valuation of $6.69 billion last year. Further, experts project that by 2028, the segment could hit $46.78 billion.
If so, we’re talking about a compound annual growth rate (CAGR) of 47.51%. That’s simply massive. And yet, we have UMC trading at a forward earnings multiple of 13.79X, even though the company also posts an above-average three-year EBITDA growth rate of 41.3%. I think UMC is easily one of the under-rated stocks to consider.
Anglo American (AAUKF)
A British multinational mining firm, Anglo American (OTCMKTS:AAUKF) is a high-risk profile among under-rated stocks. You can tell that shares trade in the over-the-counter market with its funky ticker symbol. Also, as a precious metals miner, it’s liable to suffer volatility. Sure enough, in 2023, AAUKF suffered a loss of more than 35% of its equity value.
Fundamentally, the red ink centered on palladium and other platinum group metals (PGMs). As InvestorPlace contributor Larry Ramer mentioned in November, palladium prices cratered last year. Much of the problem stems from the use of the metal. About 80% of it is used for the automotive industry, specifically for making catalytic converters. But as consumers pivot to EVs, this demand profile may suffer a huge drop.
Still, EV sales might not be as impressive as many experts have projected this year. Also, palladium may be used for other endeavors, particularly in the hydrogen space. Therefore, AAUKF’s lowly forward earnings multiple of 9.63X might be worth considering for speculative investors.
Marriott Vacations (VAC)
Throwing more risk to the table, Marriott Vacations (NYSE:VAC) offers another look among under-rated stocks for market gamblers. As a pure-play public timeshare company, Marriot Vacations suffered from declining economic sentiment in 2023. Indeed, VAC incurred a huge drop of more than 36%. High prices, high borrowing costs and a cloudy economy took their toll.
Still, if the Fed manages to engineer a soft landing, Marriot Vacations could be worth a second look. True, the high prices component would likely remain a challenge. But lower interest rates could expand the total addressable market as more people may be willing to finance timeshares. In addition, fading concerns about a debilitating recession could inspire more risk-on activities (such as targeting timeshares).
Further, VAC popped up more than 9% in the trailing month, possibly suggesting that a bottom has been printed. At the moment, shares trade for under 12X trailing-year earnings, below 72% of its peers. That could be the welcome mat for investors to label VAC as one of the hidden gem stocks.
Everest Group (EG)
If you’re seeking under-rated stocks that just might deliver the goods this year, look no further than Everest Group (NYSE:EG). Chances are, unless you’re a big fan of insurance-related investments, you might not have heard of Everest. That makes it all the better. Gaining a bit over 6% in 2023, it’s not exactly a riveting play. However, that could change thanks to the Fed.
First, Everest is a reinsurance company – basically, it’s an insurance company for other insurance companies. Of course, by backing up other enterprises’ risk profile, Everest needs to bolster the returns of its diverse portfolio. For many insurance-related entities, that involves a heavy dose of government bonds. Now, if policymakers lower interest rates, the bonds that Everest holds would be worth more due to the lower yield of newly issued debt securities.
But wouldn’t that positively affect other insurance players? Yes but here’s why EG could rank above other overlooked stocks in the space. Its return on equity (ROE) stands at 23.38%, beating out 88.54% of its peers. In other words, Everest is already highly efficient and lower rates should make it more so.
Probably the riskiest idea among under-rated stocks on this list, Hertz (NASDAQ:HTZ) faces many questions. As you know, due to the Covid-19 disaster, the rental car service suffered an ignominious bankruptcy. It was really unavoidable when air travel all but cratered during the pandemic. However, with social trends such as revenge travel, HTZ theoretically should enjoy a favorable backdrop.
Unfortunately, that hasn’t been the case. Last year, HTZ suffered a drop of nearly 31% in equity value. So yes, it may be one of the hidden gem stocks but critics will argue that it’s for a reason. Nevertheless, if the Fed goes through with interest rate cuts, Hertz could be a huge beneficiary. At the basic level, lower borrowing costs may spur discretionary expenditures, including for vacations.
Just as importantly, the economy dodged the recession bullet – a recession that many thought would materialize in 2023. Likely as a result, the personal saving rate increased over the trailing-year period from November 2023. Because the downturn didn’t arrive, people may be more confident. Thus, HTZ might be one of the speculative overlooked stocks to consider.
On the date of publication, Josh Enomoto did not have (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.