While investing in established S&P 500 companies is a proven long-term strategy for investors, there are still some good stocks to be found with outsized potential.
In many cases, these stocks are small-cap companies with ample room to grow. In others, they are companies that already command high stock prices but are still undervalued based on their performance.
Finding these hidden gems is a great way to help pad your returns and bolster your portfolio over time. Here are three dirt cheap stocks that could pop and deliver outsized returns.
Resolute Forest Products
Resolute Forest Products (NYSE:RFP) is a play on the massive spike in lumber prices that has occurred since the onset of the pandemic. Despite coming off of its 2021 highs, the average price for lumber stands at over $900 per 1,000 board feet. This compares with just $405 in December 2019.
Like most lumber producers, Resolute is currently struggling with higher business costs. In Q4, the company reported a net loss of $128 million due to these pressures. Despite this, the company repurchased 6 percent of its outstanding shares in 2021 and achieved a full-year net income of $307 million.
Particularly promising is the fact that Resolute has debts of just $190 million compared with nearly $1 billion in liquidity.
Resolute also stands up quite well in terms of its valuation metrics. The company’s price-to-book ratio stands at just 0.69, less than half the industry average of 1.66. Price-to-cash-flow is similarly low at 1.53.
Cash flow per share, meanwhile, is much higher than the industry average at $8.85 compared with $3.71. These metrics suggest Resolute could be undervalued and may be a good long-term buy for value investors.
Resolute also has an enticing set of price forecasts attached to it. The median analyst target price for RFP is $17, or 25.9 percent above its current price.
The lowest target gives the stock an 18.5 percent upside at $16. While it should be noted that there are only four outstanding ratings on the stock at the moment, the fact that even the low estimate gives it such a high upside is still quite impressive.
Resolute Forest Products stands out as a good potential buy for a number of reasons. Despite losses in Q4, the company is in a very good position going into 2022 in terms of its balance sheet. It also appears to be favorably valued, with most of its metrics standing well below industry averages.
Assuming lumber prices remain high and Resolute can bring its production costs under control, this stock could take off in 2022.
RH
Formerly Restoration Hardware, RH (NYSE:RH) is a high-end home furniture company best known for being a favored investment of Warren Buffett.
Despite its high share price, RH is likely quite cheap compared to its true value. This fact is best reflected in the median analyst price target of $519, giving the stock a projected 49 percent upside over the next 12 months.
The biggest selling point for RH is its ability to profit from the ongoing boom in American housing. As consumers buy and move into new homes, demand for furniture also increases. For RH, this translates to rapid growth and higher revenues.
The company has also successfully taken advantage of the recurring revenue business model with its loyalty program. At present, there are some 400,000 members in this program each paying $150 annually for discounted pricing on furniture. This leads to a stable stream of recurring revenue and ensures repeat business for the growing company.
Thanks to its luxury offerings, RH can also maintain margins of nearly 50 percent. This allows it to produce good profits and avoid the competitive crunch at the lower end of the furniture market.
While rising consumer prices could cause some buyers to opt for less expensive furniture, those who want luxury goods will still reliably turn to RH.
RH is a company with a great deal to recommend it from an investment perspective. With a massive 12-month upside and the ability to capitalize on the ongoing housing boom, expect the foreseeable future to be good for this stock.
This is also one of the more stable and conservative value stocks out there at the moment. Although it trades at a much higher price than the other stocks on this list, RH makes up for that fact with its potential returns and value appeal.
Carparts.com
Carparts.com (NASDAQ:PRTS) is a unique play on the automotive parts industry in that it operates entirely as an eCommerce business. Thanks to this, the company avoids the overhead associated with maintaining physical retail outlets. Trading under $10, shares of this company are well within the reach of any retail investor.
Carparts.com also has a big advantage in pricing due to its practice of offering private label products. This allows it to compete quite favorably against most of its closest rivals. As more Americans turn to online shops for their parts, this price advantage should allow Carparts.com to capture a significant portion of the market.
Carparts.com also has the highest potential upside out of the three stocks listed here. With a median target price for PRTS of $15, the stock has a projected upside of 112.8 percent over the next year. Even at the low price target of $12, investors would realize gains of over 70 percent. This leaves room for Carparts.com to underperform expectations and still produce excellent returns.
With that said, Carparts.com is likely the riskiest of these three stocks. The stock is down by more than 35 percent YTD. It also holds a slightly negative cash flow per share and a negative earnings yield, both causes for concern for investors.
Growth, however, appears to be in the company’s favor. In 2021, Carparts.com saw net sales grow by 34 percent. Long-term CAGR is projected to average 20-25 percent, giving the company excellent prospects over the next several years.
Carparts.com stands out as a high-risk, high-reward play on online auto parts sales. If the stock does pop in 2022, investors can expect outsized returns on inexpensive shares. It should be understood, however, that this scenario is far from guaranteed.
More conservative investors will likely do better to buy RH, as Carparts.com has much higher chances of volatility. For those willing to take the risk, though, this stock could be a rare opportunity to achieve high double-digit returns over a short period.
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