3 Undiscovered Stocks for 2020

5 Tips on Finding Growth Stocks with Promise

One thing I’ve learned in my more than three decades in the financial industry is this: When the stock market goes up and up and up, it pays to look for overlooked, undiscovered stocks that haven’t yet caught Wall Street’s attention.

In the past week and a half, fears of the spreading coronavirus pummeled the Dow Jones Industrial Average, sending it down more than 800 points. And yet on Tuesday and Wednesday, the Dow was up more than 400 points each day, as markets staged a full recovery. That just illustrates how dependent the markets are right now on news stories. And with a presidential election on the horizon, we can expect much more volatility as the pros and cons (fake or not) of the various candidates emerge.

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This volatility results in a couple of things: it makes investors a little wary, but the down days provide some fantastic buying opportunities. And as you know, the markets have been on an almost-straight upward trajectory in the past year, so these little breathing spaces are not always a bad thing, providing a break to step back, reanalyze our portfolios, and find some temporary bargains.

Bottom line: I’ve found—over the years—when the market becomes very volatile, it’s a great opportunity to load up on stocks that haven’t participated in the recent rallies.

This time of year, we see tons of articles about the best stock market sectors to buy for the new year. So far, I’ve seen just about every sector hyped, including financials, consumer discretionary, industrials, materials, energy, healthcare, consumer staples, emerging markets (especially China), gold, technology, REITs, retail and fast food. Have I left anything out?

I think that about covers it! Confusing, right? Well, I don’t like to depend on anyone else to do my research, so I set out to see which sectors look good for 2020. In 2019, the best-performing sectors were:

  • Technology, 44.9% gain
  • Utilities, up 26.9%
  • Consumer Staples, 18.7% return

At the bottom of the pile were:

  • Energy, -18.7% loss
  • Basic Materials, 10% gain
  • Healthcare, 10.2% gain

We are in a climate of historically low interest rates, and if the pundits are correct, the Fed will decrease them again this year. That should continue to support the housing market, which saw building permits rise 3.9% and sales of single-family homes up 2.3% in 2019. Corporate cash reserves are healthy—around $2.2 trillion—with a recent report from FactSet announcing that at least four U.S. companies (Apple, Alphabet, Berkshire Hathaway, and Microsoft) are holding more than $100 billion each in cash reserves. No doubt, that cash will be used to expand existing businesses and also to take over or merge with other companies. So, M&A activity should again be plentiful this year, after finishing 2019 with some $3.9 trillion in deals.

And for 2020, a lot of that cash will probably be deployed in the technology arena, where the internet of things (IoT), the 5G launch, and cloud computing are disrupting almost every industry. Valuations in some industries—like energy and industrials—are extremely low, yet energy demand, especially for Asia, continues to rise expeditiously, and the near-cessation of the trade war should help cyclical companies, providing some attractive investment options.

With those positive factors in mind, I decided to delve deeper into the tech, energy, and industrial sectors, to find some stocks with excellent potential. And I did. They are not some of the sexiest names you will see in the daily headlines, but their fundamentals look very interesting. But, as I always say, if they make money for you, who cares, right?

Three Undiscovered Stocks for 2020

Undiscovered Stock #1: SharpSpring, Inc. (SHSP)

SharpSpring is a cloud-based marketing technology company that offers marketing automation solutions for small and mid-size businesses. Analysts are forecasting 25% annual growth for the company over the next five years. The company has more than 8,000 global customers and participates in a $5.1 billion marketplace that is growing at a 20% annual rate. Yet, its market cap is just $149 million, making it a very small-cap stock. Consequently, if you buy into it, do so judiciously so that the stock price doesn’t get artificially spiked.

Undiscovered Stock #2: Ranger Energy Services, Inc. (RNGR)

Another small-cap stock with a market capitalization of just $109 million, Ranger provides well service rigs and other services to energy companies in the U.S. The company is only a couple of years old and still has negative cash flow, so it is somewhat speculative. But it already has some deep-pocket customers, including Noble Energy, Anadarko, Hess, EOG Resources and Chevron. With energy demand spiking up and valuations so low, it might be worth investing a few dollars.

Undiscovered Stock #3: LSI Industries Inc. (LYTS)

With a market cap of just $170 million, LSI is another stock without much Wall Street attention. The company makes lighting and graphics products that offer visual image solutions to corporate customers in the United States, Canada, Mexico, Australia and Latin America. LSI is also forecasted to grow at a 25% annual rate over the next five years. The company was founded in 1976, and has been an active acquirer of new technology and its competitors for the last two decades. Its customers include Car Max, Marriott, Food City, Burger King, 7-Eleven, and a host of others. The stock may be small cap, but it also has a healthy 3.1% dividend yield.

As I mentioned, these undiscovered companies are also all small caps (technically they’re micro-cap stocks), so a degree of speculation exists. Please don’t load up on them, but do consider dipping your toes into one or more. They just might add some pizzazz to your portfolio!

Nancy Zambell

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Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.

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