3 Beaten-Down Stocks With 100% Upside

Just as in the film “Groundhog Day,” my day starts the same way every day. 

#-ad_banner-#I pore through dozens of Wall Street reports to stay abreast of the key issues and trends impacting various industries and companies. While boning up on the issues, I also seek out Wall Street’s preferred investments, focusing on stocks that have potentially huge upside in relation to their current share price. 

Frankly, Wall Street analysts and their price targets must always be taken with a grain of salt. Hidden agendas (such as the desire to help out their investment banking peers) can cloud their thinking. So it’s wise to glean their top ideas, and then perform your own level of advanced research.

In fact, I’ve done just that. I looked at a dozen analyst stock picks that had nearly 100% upside potential and then tossed out most of them as they had too many risks or unforeseen headwinds that the analysts seem to be ignoring.

Here are three stocks that are favored by analysts, all of which have stood up under an additional layer of scrutiny. 

1. Gordmans Stores (Nasdaq: GMAN )​

This department store operator went public in late 2010 and delivered decent financial results for a couple of years but is now being hit by the sharp slowdown in retail spending. 

Gordmans earned $1.30 a share in fiscal 2012, but since then earnings per share (EPS) have slid to a recent $0.41. Analysts expect even lower profits for the current fiscal year. As a result, shares have been in a nearly two-year downdraft.

The steady slide has its roots in a series of poor merchandising selections for this retailer, which is known for sharply discounted prices on slightly out-of-favor goods. Gordmans’ board has done what any retailer in this position should do: They’ve brought in more savvy merchandisers who aim to fill the stores with a much more compelling line of goods. (A search for a new CEO is underway as well.) 

Analysts at Cannacord/Genuity think “a new merchandising team will build better misses’ and men’s assortments, and this will drive improving results.” But that’s not the main reason they think this stock will double to their $10 target price. Instead, it’s the fact that share of Gordmans trade at unfathomably low valuations. “Shares trade at 0.2x FY14E EV/sales (ratio of enterprise value to expected 2014 sales), which we believe is a going-out-of-business valuation.” 

But Gordmans isn’t going out of business. This retailer is expected to report results next week, and should report solid cash balances as too-high inventories have since been converted into cash. Simply moving this stock up to a 0.4 times enterprise value-to-sales ratio would still leave this stock as one of the lowest-valued in retail.

 

2. MediWound (Nasdaq: MDWD )​

It’s been a lousy stretch for biotech and medtech companies, especially those that had the bad timing to conduct an IPO in the midst of a recent massive sell-off. This developer of leading-edge wound care dressings initially saw its shares move up to $19, but now trade for around $11. Yet analysts think MediWound has solid growth prospects.

MediWound’s lead product is NexoBrid, a gel enzyme that “may usher in a new paradigm for the treatment of third-degree burns,” predict analysts at BMO Capital. This gel allows for a much cleaner preparation of the wound — without much blood loss — before skin grafts can be applied. Already approved for sale in Europe, the gel is in Phase III trials in the U.S. 

BMO’s analysts predict peak annual sales for NexoBrid of around $275 million, and in tandem with other products in the development pipeline, total sales could top $400 million annually. To be sure, profitability is a few years away, so BMO’s analysts looked out to 2020 sales and profit levels, discounted back to the current time, to derive their $20 price target, which represents 80% upside. 

Credit Suisse’s Brice Nudell has a more modest $18 price target. While BMO mostly focuses on the short-term opportunities for NexoBrod, Nudell is even more intrigued by MediWound’s EscharEX, which is earlier in the clinical trial process and wouldn’t hit the market until later this decade, if approved. He notes that Santyl, the current product used in burn care, generates $270 million in annual sales, and “EscharEx appears to be more effective than Santyl in burn,” he adds.

 

3. Brightcove (Nasdaq: BCOV )​

Web video remains a fast-growing category, with video streaming volumes continuing to rise at more than 20% each year. Brightcove provides all the tools needed for companies to host and stream videos. 

This company garnered a considerable amount of buzz a few years ago, and after its early 2012 IPO, shares eventually moved up into the $20s. These days, thanks to slowing growth, shares languish in the single digits.


Each year, Brightcove’s top-line growth has fallen by about 10 percentage points, from around 45% in 2011 to an expected mid-teens rate this year. Of equal concern, the company has never been profitable. 

Yet first-quarter results now suggest that investors have grown too pessimistic. First-quarter sales grew 26% from a year ago, to $31 million, and the company added 61 new customers, the strongest quarterly showing in its history. Pacific Crest Securities’ conclusion: “Growth is returning to Brightcove.”

And these analysts now think shares are too cheap, trading at just twice 2015 sales. They figure that growth investors will return and bid shares back up to a 3 times sales multiple, “which is still a major discount to peers.” That equates to a $16 price target, implying 90% upside.

Risks to Consider: These target prices assume these companies will deliver the catalysts expected of them, so it pays to track their progress each quarter to be sure the investment thesis is still intact.

Action to Take –> These stocks have stumbled badly in 2014, but each has the makings for a solid rebound. Investors have been burned so it may take some time to repair broken bonds of trust, but as long as these companies can prove that future results will be brighter, then these vastly oversold stocks will rotate right back into favor.

P.S. Investing legend Warren Buffett doesn’t just sit around and wait for a great deal on a high-quality stock he wants to own. In fact, one of his favorite investment strategies allows him to buy a stock at the exact low price he wants… while generating huge streams of income. My colleague Michael Vodicka has been using this same strategy on trusted stocks like Microsoft, Exxon Mobil and Verizon to collect 5% income yields or higher in just over a month’s time with the chance to buy these companies at a huge discount. To learn more about this Income Multiplier strategy, click here.