9 destroyed actions that look promising

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S&P 500

closed at a record high on Thursday, rising above 4000 for the first time. But not all stocks have shared those gains so far this year.

While most S&P 500 stocks are positive for the year, about one in five fell in the first quarter of 2021. Some fell for fundamental reasons, while others appear to be suffering from the shift in momentum from the growth to cyclical stock market and value names.

As soon as the headwind subsides, the names left behind are likely to recover, as their earnings estimates remain strong. In some cases, analysts have further adjusted their expectations this year. This represents a good opportunity to grab shares of fundamentally solid companies at discounted prices.

Among the nearly 100 S&P 500 companies whose shares are in negative territory in the year to date, about half are expected to post earnings per share in 2021 that are at least 20% higher than the tax profits of 2019. Among them, about 30 are expected to see this strength sustain until 2022, which means that their gains in 2022 are expected to grow at least another 10% from 2021 levels.

To find stocks whose profit potential may not be reflected in stock prices, Barron’s took those 30 names and removed all the shares that were traded more than 30 times the 2021 profit estimates. That left us with nine names.

Better yet, analysts have increased their earnings estimates for 2021 and 2022 for all stocks since the end of last year, meaning that Wall Street is becoming more optimistic about them. These discounted names are mainly growth actions in the health, technology, telecommunications and consumer sectors.

Note: 2021 and 2022 EPS are consensus estimates.

Source: FactSet

Chip Maker

Qualcomm

(ticker: QCOM), for example, has seen its stock drop by almost 10% in the year so far. Investors do not seem impressed by the company’s first quarter revenue, which was 62% higher than a year ago, but has not yet reached analysts’ expectations. In the long run, the company – known for the chips that power smartphone processors – could benefit from the worldwide transition to 5G networks and infrastructure spending proposed by the Biden government.

Vertex Pharmaceuticals

(VTRX) shares are another example where a recent setback due to negative events may have gone too far. In mid-October, the biotechnology company canceled the development of a drug that was once promising after the test results were disappointing. Its shares have fallen 23% since then and have fallen 10% in the year. Despite the failure of this single drug, Barron’s wrote in March that Vertex remains a powerhouse in the treatment of cystic fibrosis and is further developing a promising pipeline.

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