5 Cheap Growth Stocks Due for a Rebound

A rising tide doesn’t lift all ships. Even with the market climbing 9% from its August lows, many stocks remain well below their peaks. Of the 1,500 largest companies on the market, about two-thirds linger at least 10% below their 52-week highs, according to research firm FactSet. Of those stocks, roughly 640 are deep in bear territory, depressed by more than 20%.

Many of these downtrodden stocks aren’t budging for good reasons. Companies in the oil business won’t break out of their funk until the price of the commodity recovers. Other companies are battling wars of their own making. Lumber Liquidators Holdings (LL, $16.72) has tumbled 76% from its 52-week high because of concerns about the quality of its Chinese-made floorboards. Chipotle Mexican Grill (CMG, $554.89), down 27% from its 52-week high, has been hurt by slowing sales growth and concerns about a food-poisoning outbreak. (All prices and returns are as of December 17.)

Yet the roster of beaten-down stocks includes some growth companies that look cheap enough to be compelling. Down at least 10% in 2015, these stocks could rebound on even modest signs of a turnaround in their business. And their long-term growth potential still exceeds expected earnings growth for the overall market (analysts expect profits for companies in Standard & Poor’s 500-stock index to rise by 9% in 2015).

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

For Dick’s Sporting Goods (DKS, $36.19), the big problem these days is unseasonably warm weather. A balmy stretch this November and December has hurt sales of cold-weather clothing and gear, a major category for Dick’s. The shares sunk by 9.4% on November 17 after the company reported a 4% slide in profits in the quarter that ended in October. With inventories on the rise and sales at stores open at least a year staying sluggish, Dick’s trimmed its earnings forecast for the remainder of its fiscal year, which ends on January 31.

Yet winter weather will eventually arrive, propping up sales of fleece jackets and other cold-weather gear. Along the way, the retailer should be able to manage its inventory overhang with minimal impact on profit margins, says Canaccord Genuity analyst Camilo Lyon.

Longer term, Nike (NKE, $130.22) and Under Armour (UA, $81.27) are coming out with innovative products that should boost Dick’s sales. Moreover, Dick’s has its own growth plans, which include opening more than 150 stores over the next three years and expanding online sales from $628 million in its 2014 fiscal year to more than $1 billion in 2017. Analysts see profits climbing 11% in the fiscal year that ends in January 2017. Trading at 11 times estimated earnings for the January 2017 fiscal year, Dick’s looks compelling, says Lyon, who recently upgraded the stock to a “buy,” with a 12-month price target of $48.

With its shares down 10% so far in 2015, apparel maker Lululemon Athletica (LULU, $50.00) has been hit by worries about shrinking profit margins and rising costs as the firm invests heavily to expand. Lulu aims to boost sales internationally and sell more athletic wear to men, branching out from its traditional market of yoga pants and other apparel for women.

Even with revenues rising, higher costs are pressuring Lulu’s bottom line; Wall Street sees sales climbing 13% in Lulu’s current fiscal year, which ends in January. But analysts expect earnings to fall by 5%. Things should improve over the following year, though, with analysts forecasting a 19% jump in profits as Lulu’s efforts to boost profit margins bolster the bottom line.

The stock could take off if the company accelerates cost cuts. A mere 0.65 percentage point increase in profit margins on its products could help justify a share price of $64 a year from now, says Credit Suisse analyst Christian Buss, who recently upgraded the stock from a “neutral” to an “outperform” rating. He sees Lulu’s profits hitting $2.48 per share in the January 2017 fiscal year, exceeding the average analyst estimate of $2.14.

Cranking out motorcycles, off-road vehicles and snowmobiles, Polaris Industries (PII, $85.01) has racked up robust sales growth for years. Yet the stock has slid 42% in 2015. It tumbled after Polaris issued results for the second quarter that came up short of Wall Street forecasts. Stiffer competition in the motorcycle business and weakness in foreign markets are both denting the bottom line.

Yet the business is still expanding at a healthy rate. Wall Street sees revenues rising by 8% and profits by 10% in 2016. Polaris’s stock is cheaper than the overall market. It sells for 11 times estimated 2016 earnings, compared with 17 for the S&P 500. Despite some near-term challenges, the stock should fare well over the long term, says Rommel Dionisio, an analyst with brokerage firm Wunderlich Securities, who sees the stock hitting $140 over the next 12 months. As a bonus, the shares offer a 2.5% dividend yield.

[page break]

One of the world’s largest tech companies, Qualcomm (QCOM, $47.54) makes chips for mobile devices and controls critical patents for cellular technology, earning royalties off the millions of wireless products sold around the world. Yet even with sales of mobile devices climbing steadily, Qualcomm has struggled to expand. Sales slumped 4.6% in the fiscal year that ended last September, and analysts expect revenue to slide 8% in the current fiscal year. Qualcomm also faces accusations of unfair trade practices in Asia and Europe, which could result in hefty fines.

But the firm is taking measures to lift sales and profits. Qualcomm recently decided against splitting its chip-manufacturing and licensing businesses—a breakup advocated by activist investors—arguing that the businesses would be stronger together. To improve its bottom line, the firm is cutting costs and buying back shares. And it’s expanding into new areas, such as automotive and health care technology.

Granted, 2016 will be a “recovery story” for the company, says Credit Suisse. But profits should climb by 18% in the year that ends in September 2017, according to Wall Street forecasts. The stock trades for just 12 times estimated earnings for the next 12 months, well below the overall market’s P/E. With a 4.0% dividend yield and a healthy balance sheet, the shares look attractive, says Credit Suisse, which expects the stock to reach $67 over the next 12 months.

VF Corp. (VFC, $62.46) owns more than 30 apparel and footwear brands, including big names such as North Face, Timberland, Vans and Wrangler. Yet sales and profit growth have stagnated. Third-quarter earnings trailed Wall Street forecasts, and the company trimmed its sales outlook for the rest of 2015, citing weakness in spending by U.S. consumers and sluggish sales in foreign markets. The shares have sunk 15% so far this year.

Despite some near-term headwinds, VF’s business should pick up. It’s selling more goods directly to consumers, scooping up more of every sale for itself. With its vast global scale, VF could squeeze more costs out of its supplier network. Furthermore, the firm has a good track record of buying other apparel makers and lifting their profit margins. Add it up and VFC is likely to generate average earnings growth of 11.5% annually over the next three years, says Canaccord analyst Lyon. His 12-month price target: $88.