With a seemingly never-ending torrent of analyst upgrades, downgrades, and ratings reiterations, it seems small investors are left reacting to the buzz that Wall Street creates around the market's most popular stock tickers.
But there's also no shortage of opportunity for people who know how to look at the businesses most other investors are ignoring. So we asked three top Motley Fool contributors to each find a stock that's flying under Wall Street's radar. Read on to learn why they picked Q2 Holdings (NYSE: QTWO), Changyou.com (NASDAQ: CYOU), and GM (NYSE: GM).
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Quietly solidifying its industry leadership
Steve Symington (Q2 Holdings): Q2 Holdings certainly isn't the most widely followed stock on Wall Street -- though there's no denying it is on some analysts' radar, considering shares have nearly quintupled since their IPO at $13 per share five years ago. Currently, Q2 stock trades near all-time highs as the $3.5 billion e-banking solutions leader continues to take business from competitors and capitalize on what management estimates is its $8 billion total addressable market.
But shareholders should also keep in mind that Q2 isn't afraid to move aggressively to increase that addressable market -- which stood at just $3.5 billion at the time of its IPO -- whether that means expanding its product portfolio through organic investments or striking complementary acquisitions. On the latter, Q2 only recently closed on its purchases of aptly named lending leader Cloud Lending and account-opening technology specialist Gro Solutions late last year. And more deals could be coming down the pike; earlier this month, Q2 followed by raising more than $500 million in capital through a combination of convertible bonds and newly issued shares.
Of course, there's some risk in that busy acquisitive approach as it relates to the dilution, increased debt, and business integrations the purchases require. But if Q2 can continue its streak of investing wisely to both expand its markets and solidify its current industry leadership, I suspect its stock price will continue to respond accordingly.
An overlooked Chinese video game company
Keith Noonan (Changyou.com): A quick look at Changyou's stock performance in 2019 could easily give the impression that its business has gone off the rails. Shares are down roughly 45% in 2019, and it's true that the company has faced challenges in recent years stemming from the slowdown of its biggest video game franchise, but that surface-level decline is actually the result of a special dividend of $9.40 per share that the company paid out in May.
It seems likely that the dividend payment was made in order to move cash back to Sohu, Changyou's parent company and its largest stakeholder. This could make it easier to take Changyou private -- and potentially Sohu as well. While Sohu's gaming-focused offshoot was regularly profitable and had been sitting on a pile of cash, American investors rarely mounted much enthusiasm for Changyou stock, likely due to having little familiarity with its titles.
Changyou's market cap has dipped below its book value multiple times over the last year -- a good sign that a profitable business is undervalued -- and its chairman (who also chairs Sohu) has previously made attempts to take the company private. Take into account the fact that Sohu needs cash and the added possibility that a third party like Tencent might be interested in the business, and there is a multitude of ways that Changyou stock could reward shareholders.
If the gamemaker is taken private or sold, there's a good chance it will happen at a premium. If it stays publicly traded, the company looks cheap trading at just five times 2019's expected earnings. With new games launching this year, somewhere around 10 titles in its development pipeline, and new updates to keep players engaged in its main franchise, Changyou still isn't getting its due.
An automaker that's looking down the road
Chris Neiger (GM): General Motors hasn't impressed Wall Street lately. The company's share price is down about 10% over the past year, compared to the S&P 500's 7% gains. But the company's recent stumbles don't mean that investors should write off this stock just yet.
For one thing, GM is trading at a discount right now. The automaker's shares can be had for less than six times the company's forward earnings. Why does that sound like a good deal? Because despite some of the company's setbacks, GM had a solid first quarter, and the company is transforming its business to focus on electric and autonomous vehicles.
It'll take time for GM to see the benefits from this shift, but there are already some clear indicators that it's making progress, at least with self-driving cars. The company's autonomous-vehicle subsidiary, Cruise, is building self-driving tech, forging partnerships, and raising funds at a rapid pace. The company is already valued at around $19 billion and will help GM transition into the coming $7 trillion self-driving-vehicle market (by 2050).
Investors will likely have to be patient as GM turns things around, but the company's big steps forward in autonomous driving and its recent focus on electric vehicles could pay off years down the road.
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Chris Neiger has no position in any of the stocks mentioned. Keith Noonan owns shares of Changyou.com. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Q2 Holdings. The Motley Fool has a disclosure policy.