The first is that most people have a natural affinity to root for an underdog. The second and more important reason is that these stocks have the ability to produce outsized, market-beating gains.
Take Netflix (Nasdaq: NFLX), for example. The company's share price was crushed at the end of 2011, falling nearly 79% to a multi-year low of $54 in the fall of 2012. But Netflix was quick to react to concerns about its earnings power. The result was phenomenal, with shares surging more than 140% in just the past six months. Take a look at the gain below.
But if you missed those big gains in Netflix, don't worry -- because history could soon be repeating itself.
Much like Netflix, Green Mountain Coffee Roasters (Nasdaq: GMCR) was a high-flier gone horribly wrong. After skyrocketing more than 2,000% from October 2008 to September 2011, shares proceeded to lose more than 80%, crashing to below $20 in the following 12 months.
The plunge was driven by concerns related to the company's expiring patents on its popular Keurig coffee-brewing machine and K-Cup single-brew packets. But a little more than a year after the big crash, those concerns are now looking misplaced, with Green Mountain aggressively defending its product and market position.
The biggest threat to the Keurig was expected to come from Starbucks (Nasdaq: SBUX) with the introduction of its Verismo home-brewing machine. However, the Verismo has had little effect on the Keurig's sales growth.
In the fourth quarter of 2012, Green Mountain sold 4.95 million Keurig machines, up 18% from last year, while Starbucks reported sales of just 150,000 Verismo machines. Green Mountain's results are being driven by the company's continued emphasis on product enhancements, strategic partnerships and discounted models to reach a wider audience.
Green Mountain has also been focused on defending its leading position in the highly profitable K-Cup market. To combat the threat of competition from new vendors, Green Mountain has entered strategic partnerships with competitors such as Starbucks, Dunkin' Donuts parent Dunkin' Brands (Nasdaq: DNKN) and Eight O'Clock Coffee to offer their signature drinks through K-Cups and Vue packs.
In January, Green Mountain became the exclusive manufacturer of Costco's (Nasdaq: COST) Kirkland Signature brand K-Cup packs for the Keurig system. In March, Green Mountain inked a deal with Unilever (NYSE: UN) to distribute Lipton's products in K-Cup and Vue packs. Green Mountain also has a deal with Dr Pepper Snapple Group (NYSE: DPS) to sell its iced-tea products in K-Cups and Vue packs this summer.
When you add together these strategic partnerships, it's obvious that Green Mountain is positioned not only to defend its leading status, but to extend it.
However, Green Mountain isn't focused exclusively on revenue. The company is also committed to expanding its margins and has said it will reduce its workforce by 2% this May. Green Mountain is also working closely with coffee farmers to expand crop yields with a soil-enhancement technique using biochar, a special type of charcoal that the company says will boost earnings this year.
Analysts are expecting earnings growth of 14% in 2014 and annual earnings growth of 20% in the next five years. That has shares of Green Mountain trading with a forward price-to-earnings (P/E) ratio of just 19, a sharp discount to its 10-year average of 31.
Risks to Consider: Shares of Green Mountain have already been rallying from the good news, up a market-beating 26% in 2013. Even though the valuation looks great, those short-term gains could trigger profit-taking and pressure shares.
Action to Take --> Green Mountain was an epic high-flier before its fall from grace. But the company is rebounding aggressively to increase its market share. Green Mountain is also facing less competitive pressure on its home-brewing products than expected. If the company traded with its average forward P/E of 31 in the past 10 years, shares would jump 63% from current levels to $88.