It is in the nature of large sums of money to move from one asset class to another. Likewise, within stocks, funds shift from overvalued or overbought stocks to underperforming stocks. Of course, there must be a fundamental factor supporting the reversal.
It should also be noted that the S&P 500 Index trades at a cyclically adjusted price / earnings ratio of 37.98. Equity valuations appear strained and factors such as inflation and the timing of a rate hike can cause a sharp correction. In such a scenario, underperforming stocks should remain relatively resilient.
This column will talk about four underperforming stocks that have strong fundamentals. Additionally, business development has been positive and markets should see value in these names.
Let’s take a look at the factors that can cause these underperforming stocks to turn around sharply.
- Netflix (NASDAQ:NFLX)
- Alibaba Group (NYSE:BABA)
- Barrel gold (NYSE:GOLD)
- AstraZeneca (NASDAQ:AZN)
Underperforming stocks: Netflix (NFLX)
The NFLX stock has been sidelined for almost 12 months now. The stock appears to have strong support around the $ 500 levels and I believe a rise is imminent. With the increase in cases related to the delta variant, another lockdown could be considered. As the need for home entertainment continues, Netflix is expected to do well.
It should be noted that for the second quarter of 2021, Netflix reported healthy revenue growth of 19.4% to $ 7.3 billion. For the same period, the company’s worldwide paid subscriptions grew to 209.8 million viewers. However, the net addition of paid memberships has been slow at 1.54 million. That is expected to change over the next quarter with guided net additions to 3.5 million.
An important point to note is that in addition to membership growth, the average revenue per member has increased by 8%. With this trend, the company expects operating margin growth over the previous year.
The Covid-19 pandemic has also caused production delays. Ultimately, membership growth depends on creating original content. As more content is released in the coming quarters, membership growth has the potential to accelerate.
Overall, Netflix has a strong global presence with quality content. NFLX stock has remained resilient and it looks like a sharp rise is expected after prolonged consolidation.
Alibaba Group (BABA)
Alibaba shares have been among the worst performing stocks in recent quarters. Regulatory headwinds have kept the stock declining. However, it seems that the BABA share is undervalued and that a strong reversal is expected.
In a recent letter to clients, Miller Value Partners said Alibaba had “already been fined and accepted changes in its operations.” Miller also noted that “concerns have depressed expectations, creating a divergence between those and what we think are very strong fundamentals.”
When it comes to these fundamentals, Alibaba continues to post solid numbers. During the last quarter, the company recorded healthy growth in the core business segment. The segment has experienced sustained growth, with Southeast Asian markets being a key growth driver. The core business segment also remains Alibaba’s cash cow.
In addition, the growth of cloud activity has been maintained. The segment also recorded two consecutive quarters of positive EBITDA. Over the next five years, cloud business will likely be another driver of free cash flow for the business.
For the June quarter, Alibaba reported free cash flow of $ 3.2 billion. The FCF was reduced by an anti-monopoly fine of $ 1.4 billion. The key point to note is that Alibaba has great financial flexibility to pursue organic growth and aggressive acquisitions.
Underperforming stocks: Barrick Gold (GOLD)
The price of gold may be below its highs, but shares of Barrick Gold have been among the worst performing stocks in mining. In particular, in relation to the tastes of Newmont Company (NYSE:NEM), it missed. After a 25% downtrend over the past 12 months, the GOLD share now appears to be well valued.
For the second quarter of 2021, Barrick announced production of 1,041,000 oz. For the same period, the company reported an all-inclusive sustaining cost of $ 1,087 per ounce. Therefore, even if gold is between $ 1,800 and $ 2,000 an ounce, the company is able to generate healthy cash flow.
For the first half of 2021, Barrick Gold reported free cash flow of $ 744 million. I think gold is unlikely to have a downtrend. Even with the possibility of a rate hike, real interest rates will remain negative for an extended period. This will support precious metals like gold and silver. It is therefore likely that dividends will be maintained and possibly increase in the years to come.
Another important point to note is that the company has stable production prospects over the next decade. With a cash reserve of over $ 5.0 billion, the company is positioned for sustained cash flow. In addition, there is great financial flexibility to pursue the acquisition of assets.
AZN stock has been sideways for the past 12 months. However, several positive factors could translate into a sharp turnaround for the AstraZeneca share.
For the first half of 2021, AstraZeneca recorded revenue growth of 18%, which included a 9% positive impact from the Covid-19 vaccine. The new drugs have made a significant contribution to the growth in the company’s turnover. In particular, growth was robust in the oncology and new CVRM segment.
In addition, AstraZeneca has a large pipeline of late stage applicants. Currently, the company has 160 projects in the pipeline. This includes 13 new molecular entities in the company’s pipeline of 22 late-stage drugs. This would imply healthy growth in turnover over the next few years. In addition, cash flow is expected to remain strong.
AstraZeneca also has a strong global presence. As the company’s portfolio expands, this is another factor that will drive growth. For the second quarter of 2021, the company recorded 21% growth in emerging markets. Excluding China, emerging market growth was 36%.
The company also generated strong cash flow. For the first half of the year, operating cash flow was $ 2.8 billion. Strong cash flow provides the flexibility to invest in the clinical pipeline and increase dividends.
At the date of publication, Faisal Humayun had (directly or indirectly) no position in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Faisal Humayun is a senior research analyst with 12 years of experience in credit research, equity research and financial modeling. Faisal is the author of over 1,500 stock-specific articles focusing on the technology, energy and commodities industry.