3 Top Stocks Wall Street Is Overlooking

“Out of sight, out of mind.” While the origin of this simple proverb came well before the advent of modern day investing, it still holds an important lesson: Sometimes, investors need to look beyond the headlines to find the best opportunities. With a whole world of possibilities, it’s easy to focus on the companies that we hear or read about most often, but then we might miss out on under-the-radar gems.

To help find opportunities that are a little further off the beaten track, we asked three Motley Fool investors to choose top companies they believed investors might be missing out on. They offered convincing arguments for Stanley Black & Decker (NYSE: SWK), Kinder Morgan, Inc. (NYSE: KMI), and Tencent Holdings (NASDAQOTH: TCEHY).

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The right tool for the job

Demitri Kalogeropoulos (Stanley Black & Decker): This tools specialist has trailed the market so far in 2018, but mainly because of short-term concerns. Stanley Black & Decker lowered its earnings outlook in late April due to a one-time tax charge. Its profitability slipped in the first quarter, too, thanks to rising raw material costs, including steel and aluminum.

The company’s growth pace is still strong, though. In fact, organic sales jumped 4% last quarter while recent acquisitions, like the Nelson Fastener Systems segment, added another 6% to first-quarter revenue gains.

CEO James Loree and his team are hunting for more brands to add to the company’s consumer and industrial tools portfolio, so investors can expect acquisitions to play a key role in Stanley Black & Decker’s growth strategy. Still, notwithstanding the short-term profit pinch from aluminum tariffs, the company should boost organic sales by 5% while lifting adjusted earnings by between 11% and 14% in 2018.

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Better still, the company likely will convert 100% of its profits into free cash flow, which should give management plenty of resources to direct toward higher dividends and increased share repurchases as earnings improve.

Pipe dreams

John Bromels (Kinder Morgan) What does Kinder Morgan, the world’s largest pipeline owner, have to do to get Wall Street to pay attention? Announce a stellar Q1 2018? Done. Boost its dividend by 60%? Check. Buy back a quarter-billion dollars in stock shares? The company has done all of that — and more — and yet its shares still are trading at near-historic lows.

Wall Street has been bearish on Kinder since management made a (probably necessary) quarterly dividend cut from $0.51/share to $0.125/share in 2016. Then in 2017, the company’s share price managed to lag its peers even as it delivered on its strategic plans.

Finally, in Q1 2018, Kinder Morgan brought in more than $1.2 billion in cash flow, which is $804 million more than it needed to pay out its increased dividend. Natural gas transportation volumes were up 10% and natural gas pipeline earnings were up 6%. Seriously, Wall Street: What’s a company gotta do?

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Kinder Morgan probably needs to work harder on cleaning up its balance sheet. That was one of the reasons it cut its dividend in 2016. But the company’s debt still sits at 6.2 times earnings before interest, taxes, depreciation, and amortization (EBITDA), which is down from 6.9 times in early 2017 but is still very high. Management, of course, prefers to look at its net-debt-to-adjusted-EBITDA ratio, which is a better 5.05 times, but the company clearly has more work to do.

Still, Kinder Morgan is trading at a discount to its peers on an enterprise value (EV)-to-EBITDA basis that, combined with its recent outperformance and ongoing debt-reduction efforts, makes it a top prospect for investors who want to beat Wall Street to the punch.

A Chinese jewel

Danny Vena (Tencent): According to the National Bureau of Economic Research, domestic companies represent 90% of the holdings in the average U.S. investor’s stock portfolio — even though U.S. stocks only account for 49% of the world market. By staying so close to home, investors may be missing out on impressive gains.

One such opportunity is Tencent Holdings. While the company isn’t well-known in the U.S., it’s a household name in China as the owner of WeChat (also called Weixin), the most popular messaging app in the Middle Kingdom — with more than 1 billion users.

WeChat doesn’t have a comparable app in the U.S. as it combines social networking, messaging, mobile game, and payments, all in one easy-to-use platform. It also boasts integrated location-specific functionality that allows users to order food delivery, schedule ride-hailing, and even check-in for flights — all without ever having to leave the app.

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If that wasn’t enough, Tencent is the largest video game publisher in the world in terms of revenue. Honor of Kings, the company’s mobile juggernaut, boasts 200 million monthly active users and is China’s top-grossing title. Another of the company’s franchises, League of Legends, has become one of the world’s top eSports titles year after year and continues to attract new users — an impressive feat for a game that was released in 2009. The company also owns a 40% stake in Epic Games, the publisher behind the smash hit Fortnite.

Tencent also is an avid investor itself, funding 277 start-ups since 2013 and acquiring stakes in 80 public and private companies in 2017 alone. These aren’t fly by-night companies, either: Tencent holds stakes in high-profile companies like Activision Blizzard (5%), Tesla (5%), Spotify (share swap, less than 10%), and Snap — parent of Snapchat (12%). The company has spent an estimated $25 billion buying stakes in other companies in recent years.

Tencent produced impressive growth for a company with a market cap of $475 billion — increasing revenue by 48% year over year in its most recent quarter — and that’s on top of 55% year-over-year growth in the prior-year quarter, so it wasn’t a fluke.

While Wall Street continues to overlook this Chinese gem, you shouldn’t.

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Danny Vena owns shares of Activision Blizzard, Kinder Morgan, and Tesla. Demitrios Kalogeropoulos owns shares of Activision Blizzard and Tesla. John Bromels owns shares of Activision Blizzard, Kinder Morgan, and Tesla. The Motley Fool owns shares of and recommends Activision Blizzard, Kinder Morgan, Tencent Holdings, and Tesla. The Motley Fool has a disclosure policy.

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