Generally, the brighter a company's growth prospects, the more expensive the stock. There are (rare) exceptions to this Wall Street maxim, though.
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Below, Motley Fool investors highlight a few businesses whose pessimistic stock valuations don't seem to reflect their long-term growth potentials. Read on to see why Under Armour (NYSE: UA) (NYSE: UAA), AMC Entertainment (NYSE: AMC), and Groupon (NASDAQ: GRPN) aren't getting the credit they deserve from investors.
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Dan Caplinger (Under Armour): The athletic apparel space was red-hot for a long time, but increased competition in the space has recently sent shares of key players falling, and Under Armour has been one of the biggest victims. The former growth giant has seen its stock plunge by more than half in the past year, and poor performance in the U.S. retail market has led to year-over-year declines in total revenue for Under Armour. The company has also warned that the coming holiday season could be even more difficult, citing high levels of inventory that it will need to clear out at discounted prices.
Under Armour has some things going for it. Internationally, the brand is still expanding, and the company gets fewer of its sales from abroad than its competitors. That gives Under Armour a potential pathway to a recovery, and the athletic specialist is still working hard to obtain key endorsements and maintain its brand appeal among its customer base. Fashion can be fickle, and Under Armour will have to navigate the ups and downs of consumer preferences effectively in order to get back on its feet. With its nimbler ability to adapt to changing circumstances, though, Under Armour looks like the sort of deep-value play that could pay off in the long run.
Give this stock the red carpet treatment
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Rich Duprey (AMC Entertainment): Sure, Hollywood had a lousy year this year, but that doesn't mean AMC Entertainment should be receiving the drubbing it has. Shares of the theater operator have lost two-thirds of their value, suggesting the market thinks people aren't going to the movies anymore, which is completely wrong, and that means this could turn into a blockbuster stock.
Although rivals Cinemark Holdings and Regal Entertainment are also significantly lower, no theater chain has taken the beating AMC has, which is likely because of its preeminent position as the biggest theater operator in the world. But it also means investors are missing out on or undervaluing its extensive holdings elsewhere around the globe, including China, which is the second biggest movie market behind the U.S. While it was once thought that China would surpass the domestic market in size this year, a slowdown overseas has pushed back those predictions to 2020.
Even so, AMC has made substantial acquisitions, including the U.K.'s Odeon and UCI Cinemas as well as the Stockholm-based Nordic chain. That gives it a worldwide footprint that should support it from weakness in any one particular market. While Hollywood's reach is far, it is not the only movie capital, and the severely discounted AMC Entertainment provides investors with stars in their eyes an opportunity.
AMC trades at just a fraction of its sales and book value, yet analysts are expecting it to more than double its earnings next year. If and when it finally does surprise the markets with better results, look for its name to be showing its star power.
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Demitri Kalogeropoulos (Groupon): You might have to squint to see evidence of Groupon's growth, but it's there. Sure, the daily deals specialist is posting lower sales these days as it withdraws from unprofitable international markets and prioritizes earnings over revenue gains. Its key operating metrics are headed in the right direction, though. Groupon added 800,000 active customers in the third quarter while improving margins.
The company is on track to reach a few impressive financial targets this year, including boosting profitability and generating significant free cash flow. Management just raised their adjusted earnings target, too, thanks to aggressive cost-cutting efforts.
To be sure, Groupon faces big challenges as it works toward achieving bottom-line profitability in a crowded market. It's not clear yet that the deals platform's pivot toward local advertising in developed countries will be a long-term winner.
Still, with the stock valued at about 1 years' worth of revenue, compared to almost 5 times for Yelp and 3 times for TripAdvisor, investors are being offered a significant discount for the extra risk associated with this relatively young business that's still operating in the red but making big strides toward profitable growth.
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Dan Caplinger has no position in any of the stocks mentioned. Demitrios Kalogeropoulos owns shares of TripAdvisor and Under Armour (A and C shares). Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TripAdvisor and Under Armour (A and C shares). The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.