3 Underdog Stocks We're Watching

By Daniel Miller, Travis Hoium, and Timothy Green Markets Fool.com

Whether its historic tales of David vs. Goliath or the annual March Madness basketball tournamentCinderellarun, everybody loves a great underdog story. GoPro, Inc. (NASDAQ: GPRO), DineEquity, Inc. (NYSE: DIN), and TrueCar, Inc. (NASDAQ: TRUE) have all faced adversity and currently find themselves in an underdog spot, but here's why we're watching their stories.

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Go big or go home

Travis Hoium (GoPro): Everyone hates GoPro right now. The stock has lost over 90% of its value from its post-IPO peak, and after the Karma drone literally crashed on takeoff, the company couldn't seem to do anything right.

Despite the challenges, GoPro is still the industry leader in digital cameras and has drones and VR cameras to look forward to in its future. Karma may have crashed when it was launched, but the fact that GoPro launched a drone at all is better than some very high-profile competitors. And the company will learn a lot for the next-generation Karma down the line.

Image source: Getty Images.

What'll be important to watch are GoPro's VR products because that's where it may be able to take a leadership position. VR cameras are starting to become more common, but GoPro hasn't introduced a camera yet that's priced for widespread adoption. 2017 could be the year that changes.

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Though it's easy to see what GoPro could be making from a product standpoint, management hasn't executed on its opportunities as they've emerged. That has to change, and if it does, GoPro could have a nice recovery for investors.

Trouble at Applebee's

Tim Green (DineEquity): 2016 was a rough year for the restaurant industry, and the phrase "restaurant recession" is getting thrown around quite a bit these days. DineEquity, which operates and franchises the Applebee's and IHOP brands, is doing worse than most. The stock plunged in early March following a disappointing fourth-quarter report, with Applebee's suffering a 7.2% decline in comparable sales and IHOP seeing comparable sales drop 2.1%.

DIN data by YCharts.

Shares of DineEquity are now down about 54% since peaking in early 2015. The stock trades for just 9.4 times the company's guidance for 2017 adjusted free cash flow, a valuation that reflects the struggles at both of its brands. Applebee's is the biggest problem, and DineEquity will be making significant investments this year in order to fix it. From improving food quality to overhauling its marketing, big and necessary changes are coming.

DineEquity is certainly a risky investment, given the problems at its brands. But its franchise business model is highly profitable, with an operating margin of nearly 35% in 2016, and the valuation is pessimistic, to say the least. A dividend yield in excess of 7% is certainly enticing, but a dividend cut in the future isn't out of the question if the situation doesn't improve.

I'm keeping my eye on DineEquity. Turnarounds are hard, and there's no guarantee that the company will be able to right the ship. But the stock will soar if DineEquity pulls it off.

Underdog on the rebound

Daniel Miller (TrueCar): It's difficult to believe that it was just over a year ago that TrueCar looked like a complete dumpster fire. The company's relationship with its network of car dealers was in shambles, and the largest dealership group, AutoNation, had completely cut ties with the company. Its earnings before interest, taxes, depreciation, and amortization (EBITDA) plunged, and its founder stepped down while other executives were defecting for other jobs at a frightening pace.

Then something unexpected happened: Chip Perry took over as CEO and immediately started mending TrueCar's relationship with dealers via the "Dealer Pledge." It took time, but TrueCar rightsized the relationship by giving more transparency to dealers during sales completions and made its information-sharing requirements less significant, among other factors. Just look at the rebound in adjusted EBITDA over the past year.

Data source: TrueCar's Feb. 16, 2017, earnings presentation.

TrueCar has been able to revive its top-line revenue, continues to rope in year-over-year gains in website traffic, and plans to consistently increase its conversion rate, which will fuel bottom-line growth. Its network of dealers is at a record high as more dealerships see the value in TrueCar and want to join. The company has gone far over the past year, and is clearly in capable hands -- TrueCar is an underdog on the rebound, and 2017 might end up being a record year.

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Daniel Miller has no position in any stocks mentioned. Timothy Green has no position in any stocks mentioned. Travis Hoium owns shares of GoPro. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool recommends TrueCar. The Motley Fool has a disclosure policy.