The big Wall Street banks may be considered the "experts" when it comes to stocks. After all, they get paid the big bucks to take companies public, guide mergers and acquisitions, and rate stocks buy or sell, but that doesn't mean they're always right about the market. In fact, Wall Street analysts have well-known biases, including short-termism, or favoring the short-run performance of a stock over the long-term prospects. Wall Street banks also tend to look fondly at the stocks they've shepherded into the public markets, which may explain why Uber and Lyft are now trading underwater. Other times, Wall Street simply gives up on a stock that still has potential.
Individual investors can take advantage of Wall Street's oversights and biases if they know how spot them. Keep reading to see why Baidu (NASDAQ: BIDU), Ford (NYSE: F), and Stitch Fix (NASDAQ: SFIX) could present outsize rewards for individual investors.
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You don't have to search hard for this opportunity
Dan Caplinger (Baidu): It wasn't that long ago that Baidu was one of the most popular stocks in the emerging markets. With the Chinese internet industry on the upswing, Baidu's prowess in providing search results to users led to inevitable comparisons with the primary provider of internet search to the U.S. market. Yet even as the e-commerce and digital revolutions have continued to make progress in China, Baidu's stock has languished, and its market capitalization remains barely more than a tenth of what key rivals like Alibaba (NYSE: BABA) are able to boast.
Recently, part of the problem has been that Baidu hasn't been able to keep up consistent growth. Although its results in the fourth quarter of 2018 were solid and included a 22% boost to revenue, Baidu projected that it'd only see top-line growth in the 12% to 18% range to begin 2019. With a streak of substantial deceleration in its growth rate, Baidu hasn't been able to turn its dominance in internet search in China into other revenue-generating opportunities to the same extent as many had hoped.
Rising costs have worried investors, but they reflect Baidu's attempt to accelerate future growth. With a host of promising projects, Baidu has the ability to break out of its malaise and produce impressive gains if it can execute on its opportunities well.
A turnaround gaining traction
Daniel Miller (Ford): Ford has slowly but surely shed roughly 22% of its value over the past three years, while rival General Motors has increased 24%, and at Ford's current price-to-earnings ratio of 13, Wall Street has left the automaker on the roadside.
To be fair, Ford has struggled over the past couple of years to put together a viable turnaround plan in place, with details that satisfied investors and analysts alike. The good news is that Ford's first-quarter results suggest the restructuring is finally gaining traction, and with a couple of other developments in place, it could be poised to succeed in the coming years despite a slowing North American vehicle market.
Despite battling higher commodity costs, Brexit, trade tensions, and currency headwinds, the company posted a 12% increase in adjusted operating profit, reaching $2.4 billion during the first quarter. Ford's adjusted earnings per share checked in at $0.44, which torched analysts' estimates of only $0.27 per share. Earlier this year, Ford had declined to give specific full-year guidance, throwing even more uncertainty into the equation for investors to consider. However, CFO Bob Shanks now believes that, in part thanks to the strong first quarter, 2019's results will improve over the prior year. That's a positive step.
There are also a number of developments that bode well for investors. Consider that Ford's aggressive refresh of its product portfolio will continue over the next few quarters, setting the stage for better profitability in 2020 and 2021. Exiting less profitable segments and markets globally will cost the company with multiple one-time charges in the near term, but it should enable more profitable growth globally over the long term.
Ford also made a big move teaming up with and investing $500 million in Rivian Automotive, a Michigan-based electric-vehicle start-up, opening the door for the two companies to develop an upscale electric pickup truck and SUV. The partnership will produce an intriguing product, but more importantly, it shows that Ford is finally developing long-term partnerships to position itself for the future of electric fleets and eventually driverless vehicles.
Wall Street and many investors gave up on Ford after it started losing momentum in 2016. And while it took longer than anticipated to develop a viable turnaround plan, it appears to be gaining traction. If Ford positions itself to be more profitable while developing technology for electrified fleets and driverless vehicles, giving up on it now would be a mistake.
A breakthrough clothing company
Jeremy Bowman (Stitch Fix): Stitch Fix, the customized styling service, was a market darling for about three months last summer. The stock surged more than 150% to more than $50 from June to September, as enthusiasm built for the disruptive clothing company following a strong earnings report last June. However, shares promptly fell of a cliff, after the September earnings report showed weaker-than-expected customer growth. Wall Street opinion suddenly shifted. Analysts came out of the woodwork to downgrade the stock, questioning the company's ability to withstand a threat from Amazon, and seemed to start thinking that the company and its central brand promise of selecting clothes for you may just be a fad. Analysts also seemed wary of a repeat of Blue Apron, the subscription meal-kit service whose shares have tumbled from $10 to less than $1 in just two years.
Stitch Fix has been out of the limelight since, trading between $20 and $30 with a couple brief exceptions. It's hard for growth stocks to get back in the market's graces, but it's a mistake to think the Stitch Fix growth story is done. This is a company making a long-term play at a new, discovery-based form of apparel shopping, and it's capitalizing on two major trends in retail-e-commerce and customization. The company has just started expanding into the UK, its first international foray, and Stitch Fix should find a ripe market there in part because online apparel shopping is more common in the UK than in the United States. It's also recently launched other categories, including men's, plus-sized, kids, and extras.
Meanwhile, the company continues to add new customers and coax them into spending more money on the site. Stitch Fix isn't going to change the way everyone shops overnight, but the company is delivering steady growth and profits. It's ultimately up to the company to deliver results, but the long-term opportunity is clearly there for the taking.
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Dan Caplinger owns shares of Ford. Daniel Miller owns shares of Ford and General Motors. Jeremy Bowman owns shares of Ford, General Motors, and Stitch Fix. The Motley Fool owns shares of and recommends Baidu and Stitch Fix. The Motley Fool has a disclosure policy.