Going right when the investing crowd is going left can leave you feeling uneasy, but the well-trodden path usually means all the easy money has been made. Looking at what others are ignoring is a better plan for making big investment gains.
We've tasked three of our Motley Fool contributors with finding three out-of-the-way stocks that Wall Street is overlooking and they've identified Iridium Communications (NASDAQ: IRDM)(NASDAQ: IRDMB), Winnebago (NYSE: WGO), and Five Below (NASDAQ: FIVE) as possibilities.
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Look skyward at this investment
Dan Caplinger (Iridium Communications): Everyone knows just how instrumental the wireless revolution has been in transforming the way the world communicates. With billions of people carrying mobile devices everywhere and using them to text, watch video, make phone calls, send email, and use popular social media sites, the companies that provide the network connections that make those interactions possible have found their services in high demand.
Where Iridium comes in is where land-based wireless networks can't go. Whether it's because of terrain, remoteness, or a lack of capital to produce the necessary infrastructure, when there's no traditional wireless network available, Iridium's satellite communications network gives both individual and enterprise customers the ability to share data and talk via voice or video anywhere.
Over the past year or so, the Iridium NEXT program has launched dozens of new satellites into orbit in order to upgrade the company's network. Already, that's leading to an uptick in user subscriptions, and Iridium is seeing more interest particularly in Internet of Things-based applications to help customers track remotely located equipment and other assets. With no end in sight to the trend toward interconnection, Iridium should see even more demand as time goes by, and that in turn should help its investment in its satellite infrastructure pay off.
Still on a road to growth
Daniel Miller (Winnebago): Winnebago, a manufacturer of motor homes, towables, and specialty parts and services, isn't a sexy story stock and with a price-to-earnings ratio of 12 times, it clearly is overlooked by Main Street and Wall Street investors, in part due to rising steel and aluminum prices. However, the company made a promising acquisition and it posted an excellent third quarter -- maybe we should stop overlooking Winnebago?
In early June, Winnebago acquired Chris-Craft, an iconic recreational boat manufacturer known for craftsmanship, quality, and a brand image dating back to 1874. The acquisition lays the groundwork for Winnebago to enter the marine market, which management believes to be a significant platform for future revenue growth. It's also a move that helps Winnebago further diversify its products within the outdoor lifestyle market, while opening opportunities to create cost synergies between the two operations.
Winnebago's third-quarter results sent its stock up 15% initially -- although it has since given back those gains -- and also helped relax investors concerned about near-term growth. The RV manufacturer's revenue jumped 18% year over year, thanks to a 33% sales surge in its towable segment. The interesting part about that jump in revenue is that towables are generally less expensive RVs popular with a younger demographic, which signals the company's future sales bloodline still has high demand for camping.
Furthermore, despite rising aluminum and steel prices, Winnebago's gross margin increased 30 basis points to 15.2% during the third quarter, compared to the prior year. The rising gross margins were driven by cost reductions with suppliers and minimal price increases to customers, which offset rising material costs. At a price to earnings of 12 times, Winnebago is overlooked by Wall Street, but with a promising acquisition and rising revenue and gross margins, it may prove to be an excellent value stock for long-term investors.
The best discount retailer
Rich Duprey (Five Below): Over virtually whatever time frame you want to look at, Five Below has been the top-performing discount specialty retailer, with shares more than quadrupling since its 2012 IPO. That's a pretty amazing performance for a business that sells all its products for $5 or less.
Five Below's success is predicated on selling what it calls "trend-right" products, toys, gadgets, or games that make a big splash with preteens and adolescents. Think Silly Bandz and fidget spinners as the types of merchandise that would be a big hit with the young crowd, though it also has a portfolio of brands it keeps in store to help maintain sales when there is no fad that's caught the imagination of the teens and tweens set.
Now that Toys R Us is no longer in the picture, you're going to have all sorts of retailers angling to get a piece of that action, but Five Below could be a big winner, too, because of its cheap price points. CEO Joel Anderson said in June that the retailer had been "introduced to several new vendors as the Toys R Us transition is taking place."
Without question, Five Below has been on a tear this year, and just since its last earnings report in June, the stock is up about 40%. While headwinds such as tough comparable sales comparisons, no breakout product on the market, and flattening trend in margins may mean there could come a time when you can buy in at better prices, for investors with a long-term outlook, there may be no better retailer to buy into than this.
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Dan Caplinger has no position in any of the stocks mentioned. Daniel Miller has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.