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4 Underperforming Stocks to Buy for a Reversal Rally

Investor Place · 11/11/2021 06:00

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Underperforming stocks are easy to miss in a market like this. In general, there is significant market focus on hot stocks. It makes sense to ride on positive investor sentiment, a technical break-out and positive business news.

At the same time, the fear of missing out on a big rally often leads to investors getting trapped at higher levels. Earlier this year, it didn’t take time for Lucid (NASDAQ:LCID) stock to correct from $65 to $20. This risk is minimal when investors consider underperforming stocks. In particular, at a time when broad market valuations look stretched.

Typically, underperforming stocks would be names that have delivered returns lower than the index return. Or returns that are lower than peer group stocks. The reasons can be company specific challenges or industry headwinds.

I want to focus primarily on high-quality names that have been among the list of underperforming stocks. Sooner or later, the focus will be on these stocks as markets look for value. I have also discussed one underperforming penny stock, which can possibly double at the blink of an eye.

Let’s dig deeper into the fundamentals of these underperforming stocks.

  • Intel Corporation (NASDAQ:INTC)
  • Nio (NYSE:NIO)
  • Lockheed Martin (NYSE:LMT)
  • Sundial Growers (NASDAQ:SNDL)

4 Underperforming Stocks to Buy: Intel Corporation (INTC)

a magnifying glass enlarges the Intel logo on the company website
Source: Pavel Kapysh / Shutterstock.com

For year-to-date 2021, INTC stock has been largely sideways. The stock trades at a forward price-to-earnings ratio of less than 10. Additionally, INTC stock offers investors a healthy dividend yield of 2.7%. I believe that at current valuations, a break-out on the upside is imminent.

An important point to note is that Intel is in a period of high capital expenditure. The company’s focus on investment and innovation is likely to deliver results in the next few years.

Intel has already committed to invest $20 billion in two state-of-art semi-conductor foundries in Arizona. For 2021, Intel has committed to invest $18 to $19 billion. Even after this investment, Intel expects a free cash flow of $12 billion.

Furthermore, for 2022, the company has guided for capital expenditure (mid-range) of $26.5 billion. Clearly, the company is setting stage for future growth.

The semi-conductor segment is likely to remain the cash flow driver. However, Intel has increasingly focused on emerging segments such as the Internet of Things. In the next few years, IoT is likely to be a key growth driver.

With this outlook, INTC stock looks poised for a rally. Long-term investors can consider exposure at current levels. I would also not be surprised with a sharp rally in the near term.

Nio (NIO)

A Nio (NIO) sign and logo on a tan concrete building.
Source: Sundry Photography / Shutterstock.com

In the recent past, electric vehicle stocks like Tesla (NASDAQ:TSLA) and Lucid Motors have surged. However, Nio stock has been a true underperformer. Over a 12-month period, the stock has been essentially flat, off just 8%.

However, I believe that a strong rally is impending and there are several possible catalysts. It’s worth noting that Nio has already initiated international expansion. The company is likely to expand in several European countries in the coming quarters. This will help in boosting medium-term vehicle deliveries.

Nio also has a strong pipeline of new launches. For 2022, the company plans to launch three new models. This will include the company’s second sedan, ET5.

Another point worth noting is that Nio reported cash and equivalents of $7.5 billion as of Q2 2021. Recently, the company announced an at-the-market offering of $2.0 billion. With a strong cash buffer, the company seems fully financed for the next 12-24 months.

In addition to company-specific factors, the electric vehicle industry has positive tailwinds for the next decade. Even with intensifying competition, there is ample scope for sustained growth.

For Nio, as vehicle deliveries increase, vehicle level margin expansion has followed. Once operating and free cash flows accelerate, Nio stock has meaningful upside potential.

Lockheed Martin (LMT)

A Lockheed Martin (LMT) Space Systems sign in Sunnyvale, California.
Source: Ken Wolter / Shutterstock.com

LMT stock has been an underperformer in the last 12-months and currently trades at an attractive forward P/E of 13.0.

As markets look for value, I would not be surprised if the stock delivers 10% to 20% returns in the near term.

According to analyst estimates, LMT stock has an average price target of $383.88. This would imply an upside from current levels around $337.

From a business perspective, Lockheed Martin has stable cash flow visibility for the coming years. As of Q3 2021, the company reported an order backlog of $135 billion. With this backlog, Lockheed expects operating cash flow in excess of $8.0 billion for 2021 and 2022.

An important point to note is that LMT stock has an annualized dividend of $11.2. Dividends are sustainable considering the backlog and cash flow outlook.

I also like the fact that LMT stock is a low-beta name. In general, defense stocks are immune from economic shocks. Even during the pandemic year, global defense spending increased. With Lockheed increasingly getting orders from outside the United States, the long-term outlook seems bright.

Sundial Growers (SNDL)

sndl stock Sundial Growers company logo icon on website
Source: Postmodern Studio / Shutterstock.com

SNDL stock has been among the underperforming penny stocks. After being sideways to lower in the last six months, the stock seems poised for a rally.

One reason for the stock remaining depressed is a massive equity dilution. However, Sundial has been utilizing the cash buffer for organic and acquisition-driven growth.

In the investment division, Sundial has already committed to invest $588 million in the joint venture with SAF Group. The joint venture is targeting equity, debt and hybrid investments in the global cannabis industry. For the first half of 2021, Sundial reported revenue of $25.2 million from the investment portfolio.

Further, Sundial also has a portfolio of cannabis brands. With the company’s acquisition of Spiritleaf and Nova Cannabis retail network, Sundial is vertically integrated with a strong presence in Canada. As the sale of branded products increase, the company is positioned for EBITDA margin expansion.

The global cannabis market was worth approximately $20 billion in 2020. Sundial expects the market size to increase to $47 billion by 2025.

Given the growth outlook, there is likely to be ample opportunities for Sundial to expand its investment portfolio. Further, with a focus on having a narrow, but quality SKU, the company’s branded portfolio is likely to deliver results.

Remember to be careful whenever investing in penny stocks you haven’t investigated. Consider reading our penny stock primer, How to Profit Without Getting Scammed.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of 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 a focus on the technology, energy and commodities sectors.

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