3 Underdogs Stories

10/17/2014 7:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

Stocks in an industry become underdogs when the market overreacts, lowering expectations and turning the stock into a value play. And who doesn't like a good underdog story? observes Marshall Hargrave in Daily Profits.

There's a reason that Rudy is one of the most popular sports movies of all time. The three stocks below are interesting underdog stories.

These aren't the biggest or even the best companies in their respective industries, but with expectations so low, you might call them the Rudy stocks of investing.

Rite Aid (RAD)

This drug retailer is the third-largest player in the United States. Shares are down 18% over the last month after the company offered lower-than-expected earnings guidance for the full year.

And although it's much smaller than its major peers, it is the cheapest. The shares trade at a forward P/E ratio based on next year's earnings estimates of 13. Its P/E-to-growth rate (PEG) ratio is a mere 0.5.

Rite Aid's recent focus has been on selling higher-margin private-label products and opening GNC store-in-a-stores. Rite Aid has over 2,200 GNC store-in-a-stores.

The beauty of its GNC partnership is that the shift toward healthier living and the aging of Baby Boomers will help boost the demand for vitamins and supplements.

Outerwall (OUTR)

Outerwall runs a number of kiosk businesses that are meant to tap into America's rising demand for convenience. It all started with its coin-counting kiosks, Coinstar, located in grocery stores.

Its staple business has become Redbox, accounting for over 80% of company-wide revenues. Its Redbox business is currently battling Netflix (NFLX).

Outerwall is much cheaper than Netflix. It trades at a forward P/E ratio of 9, while Netflix trades at 70. Outerwall's PEG ratio is a mere 0.5.

Outerwall also generates a lot of free cash flow for its investors. Its free cash flow yield (which is the percentage of free cash it generates per share) is an impressive 25%, compared to Netflix's 10%.
  
Orbitz Worldwide (OWW)

Orbitz is the smallest competitor in the online travel agency market. This includes going head-to-head with the likes of Priceline Group (PCLN) and Expedia (EXPE).

Although it's a small player, Orbitz already has a mobile platform, which should be instrumental in gaining market share in an under-penetrated online hotel market. Orbitz also has a new loyalty program that it hopes will give it a larger presence in the hotel business.

On the surface, Orbitz trades in line with its two major peers on a forward P/E ratio, but is much cheaper on a price-to-sales and price-to-free-cash-flow basis.

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