I firmly believe that 2023 will be a year for careful stock selection, rather than expecting broad indices to perform. Several stocks are ones I’d call under-the-radar hidden gems with multi-bagger upside potential. At the same time, there are visible but underrated stocks that can outperform as well.
The market’s nature is to follow a cycle of euphoria, decline, and consolidation. Underrated stocks would typically be names that have not seen euphoria. However, these stocks are often out of favor due to industry or company-specific headwinds. Their valuations are attractive, and positive business developments reinforce a bullish view from value investors.
I also believe that there are a number of underrated stocks with the potential to deliver at least 100% returns over the next 12 months. These stocks are worth holding even beyond this period, as they represent attractive businesses with long-term cash flow growth potential.
Let’s discuss three underrated stocks that are poised for a meaningful rally in 2023.
E-commerce stocks have been among the hottest stocks in the post-pandemic era. However, after a 2022 beat down, many of these previous high-flyers are now trading at attractive valuations. Indeed, Coupang (NYSE:CPNG) is one such stock I’d put in this bucket, and it makes my list of underrated stocks to buy for this reason.
For 2023, the critical catalyst many view as necessary for CPNG stock is sustained EBITDA margin expansion. In Q3 2022, Coupang reported a product commerce EBITDA margin of 4.8%. On a quarter-on-quarter basis, the company’s margin expanded by 280 basis points. With operating leverage, Coupang is likely to move closer to its long-term EBITDA margin target of 7% to 10%.
That’s good. However, it’s also worth noting that Coupang reported cash and cash equivalents of $2.9 billion as of Q3 2022. Thus, the company has ample financial flexibility for expansion in Korea and other Asian markets. Coupang believes it has tapped just 50% of Korean online shoppers. Therefore, there is plenty of headroom for revenue growth.
Overall, Coupang has the potential to deliver robust cash flows in the coming years. After some consolidation below the $20 level, CPNG stock is poised for a big breakout rally.
Tripadvisor (NASDAQ:TRIP), the world’s largest travel guidance platform, looks attractive. TRIP stock has corrected by 14% over the past 12 months, and the company’s downside seems capped at its recent levels, around $24. With the renewed surge in global travel and tourism following the pandemic, the upside potential for TRIP stock is significant.
Among the positives I’m looking at is the company’s revenue growth. Tripadvisor reported revenue of $459 million as of Q3 2022, which was 107% higher over the quarterly level reported in 2019. Thus, not only has Tripadvisor surpassed tis pre-pandemic levels in terms of revenue, but it has seen improvement in its adjusted EBITDA margin as well. I expect this margin improvement to be sustained in 2023.
Another fundamental to note is Tripadvisor’s free cash flow of $46 million for Q3 2022. Currently, the company’s annualized FCF potential is around $200 million. Tripadvisor also has $1 billion in cash and cash equivalents. With substantial financial flexibility and an improving industry outlook, I expect Tripadvisor to pursue inorganic growth. Besides the company’s core business, Tripadvisor is already generating healthy revenue from Viator and TheFork.
Lithium Americas (LAC)
Given the impending lithium supply gap, lithium stocks are an attractive investment theme. However, Lithium Americas (NYSE:LAC) stock has underperformed with negative returns of 12% in the last year. Thus, I think it’s among the list of underrated stocks poised to surge higher in 2023 and beyond.
In an important development for the company, General Motors (NYSE:GM) and Lithium Americas agreed to jointly develop the Thacker Pass project. The former will make an equity investment of $650 million in Lithium Americas, which is significant consider the asset’s net present value of $4.95 billion. Once commercial operations commence, it will be a cash flow machine for the company.
Lithium Americas has also decided to split its business into two entities. The company’s U.S. assets will fall under Lithium Americas, and international investments will be under Lithium International. I believe the split will unlock value and make access to funding relatively easier.
With quality assets and high financial flexibility, Lithium Americas is poised to create tremendous value in the coming years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.