Wall Street analysts don't hold all the aces. Sometimes, the pros miss out on fantastic investment ideas. Getting in early on these under-followed story stocks can make you some serious money -- share prices often rise when analysts start their coverage, after all.
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We asked three Motley Fool investors for some high-powered stock tips with low analyst interest. Read on for a quick introduction to Kroger (NYSE: KR), Extreme Networks (NASDAQ: EXTR), and WD-40 Company (NASDAQ: WDFC). You'll like what you'll see in these near-forgotten classics.
A discount for this leading grocery-store chain
Demitri Kalogeropoulos (Kroger): It wasn't long ago that Kroger was one of Wall Street's favorite stocks. But the supermarket chain has underperformed the market over the last two years and completely missed 2017's rally.
The main thing that changed was Kroger's sales-growth pace, which had been running at between 4% and 6% for most of 2014 and 2015. Since then, comparable-store sales dipped into negative territory and were stuck there as recently as early fiscal 2017.
Yet Wall Street overreacted to this decline, in my view. After all, much of it had to do with the industrywide price deflation that impacted rivals, as well. Kroger's sales volumes kept up a steady growth pace, along with its market-share gains -- so the comps' dip was likely temporary.
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On the other hand, weakening industry dynamics forced the retailer to step away from its prior earnings growth target that promised investors profit gains of between 8% and 11%, plus a growing dividend. Instead, Kroger is likely to post lower earnings for fiscal 2017 as it invests in growth initiatives like lower prices, online ordering, and home delivery.
The good news is that these moves have put comps on pace for their fourth-consecutive quarter of improvements, and that should give Kroger solid momentum as it aims to double its addressable market by expanding into the prepared-foods segment.
150% gains amid deafening analyst silence
Anders Bylund (Extreme Networks): The enterprise-class networking world has gained a new giant, but analysts largely haven't noticed it yet. Through a series of smart acquisitions, old-school Ethernet-hardware specialist Extreme Networks has added modern technologies, like wireless mesh networks, fiber-optic transceivers, and virtual network-management tools in recent years.
The new and improved Extreme Networks has earned industry plaudits including a coveted spot in Gartner's Magic Quadrant for wired and wireless network products. Armed with these selling points, a larger sales division is stealing enterprise contracts from HP Enterprise's (NYSE: HPE) Aruba Networks segment and from Cisco Systems (NASDAQ: CSCO) -- the incumbent leaders in Extreme's chosen target market.
Investors are already loving Extreme Networks' stronger market position, driving share prices 150% higher in 2017. Meanwhile, Cisco's stock gained a respectable 28% and HP Enterprise notched a much smaller 9% return.
Yet, Wall Street has been slow to catch on. An army of 20 analyst firms have prepared earnings estimates for HP Enterprise's next quarterly report, and Cisco notched 26 earnings forecasts. In Extreme's corner of the Street, you could hear a pin drop as only five firms gathered to provide earnings estimates.
Furthermore, the stock has room to run even higher in 2018. Extreme Networks' shares can be bought for just 11 times forward earnings today.
You haven't missed the boat on Extreme Networks, and Wall Street is hardly even aware that there's a journey going on over here.
Boring Wall Street analysts to death with steady returns
Tyler Crowe (WD-40 Company): With so many analysts filling the wings at brokerages and financial institutions, it's not that often that a company gets as little attention as WD-40. As it stands, only one analyst firm currently covers the stock and has earnings estimates. While there are likely a multitude of reasons this is the case, one significant factor is that the company's business is incredibly consistent and predictable.
There's almost no scenario where you can call WD-40 a growth stock. Over the past 10 years, it has only produced total revenue growth of 20%. The enticing part for investors, though, is that those revenues come with high margins and high rates of free cash flow. For every dollar of revenue, WD-40 produces about $0.10 of free cash flow.
Since the business doesn't require high levels of capital spending to maintain current operations or expand production -- WD-40 contracts out all manufacturing for its products to third-party suppliers -- it can return that cash to shareholders with a fast-growing dividend and share repurchases. As a result, that 20% increase in revenue has translated into a 100% increase in earnings per share and a 378% total return.
WD-40's business may not get much love from Wall Street analysts, but any serious long-term investor has to be intrigued by a company that can continue to manufacture solid returns with such modest revenue growth. With shares trading at 31 times earnings, buying WD-40's stock perhaps isn't ideal today -- but it's certainly a company you should have on your radar.
10 stocks we like better than Kroger
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Anders Bylund has no position in any of the stocks mentioned. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Tyler Crowe owns shares of Kroger and WD-40. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.