7 Stocks to Buy for Huge Gains in a Difficult Market

At the beginning of 2022, the S&P 500 index was trading close to 4,800. Almost 18 months later, the index trades lower by 8.7% at 4,374. Clearly, the markets are navigating through challenging times. And investors need to scan for the best stocks for a difficult market. One idea is to invest in blue-chip stocks that are undervalued and have a robust dividend yield. Total returns can be high in these stocks. Another strategy is to invest in massively undervalued growth stocks that have impending catalysts.

Even in challenging market conditions, stocks with positive triggers surge higher. Tesla (NASDAQ:TSLA) surging by almost 140% for the year is a good example. The focus of this column is on growth stocks for huge gains even if the broad market is sideways. It’s worth noting that inflation remains high. It’s important to allocate a part of the portfolio towards growth and penny stocks. This will ensure that total portfolio returns are positive when adjusted for real inflation.

Let’s discuss the best stocks for a difficult market among high-growth stocks that are undervalued.

Li Auto (LI)

Li Auto (NASDAQ:LI) is among the best stocks to buy from the EV segment. The stock has surged by 61% for the year even as Chinese EV peers remain depressed. The reason is stellar financials and sustained growth in vehicle deliveries. As competition in the EV industry intensifies, there will be clear winners and losers. Li Auto has demonstrated the ability to grow even in challenging market conditions. Amidst the pricing war and inflationary pressure, the company’s margin and cash flows have been robust. For May, Li reported delivery growth of 146% on a year-on-year basis to 28,277 cars. The company’s retail network has expanded to 314 stores in 124 cities.

It’s worth mentioning that as of Q1, the company had $9.46 billion in cash. With robust free cash flows, Li Auto is positioned for aggressive expansion. The company has guided delivery growth in the range of 164.9% to 182.4% in Q2 2023. Strong upcoming results will ensure that the positive stock momentum sustains.

Riot Platforms (RIOT)

Among Bitcoin miners, Riot Platforms (NASDAQ:RIOT) is worth considering for big gains. The first reason to like Riot is a quality balance sheet. As of Q1 2023, the company reported a total cash buffer (including digital assets) of $390 million with no long-term debt outstanding. This positions Riot for aggressive expansion.

The company is also attractive as a low-cost Bitcoin miner. For Q1, Riot reported $9,438 as a direct cost to produce one Bitcoin. Assuming a scenario where Bitcoin surges in the next few quarters, Riot will be positioned for healthy margin expansion. It’s worth noting that Riot has pursued sustained growth in mining capacity. As of Q1, the company reported a capacity of 10.5EH/s, which was higher by 144% on a year-on-year basis.

Leonardo DRS (DRS)

Leonardo DRS (NASDAQ:DRS) is an emerging name from the defense sector that looks attractive at a forward price-earnings ratio of 26. DRS stock has trended higher by 38% for the year and I believe that the rally will be sustainable. As an overview, the company is a provider of defense products and technology to the U.S. military and allies. Last year, 64% of the revenue was from advanced sensing and computing. Further, the integrated mission systems segment generated 36% of revenue.

As of Q1 2023, Leonardo reported a healthy order backlog of $4.3 billion. With strong order intake, the company has clear revenue and cash flow visibility.

It’s worth noting that the company was formed after the merger of Leonardo with Rada Electronic. With a strong balance sheet, Leonardo DRS will pursue organic and inorganic growth opportunities. Given the global geopolitical scenario, industry tailwinds will support growth.

Scorpio Tankers (STNG)

Scorpio Tankers (NYSE:STNG) stock seems significantly undervalued with a forward price-earnings ratio of 4. The stock also has an attractive dividend yield of 2.26%. I also believe STNG could double in the next 12 months. It’s worth noting that for Q1 2023, the company reported 119% growth in revenue on a year-on-year basis to $377.1 million. A strong product tanker market supported the company’s growth.

There are two other important reasons to be bullish on Scorpio Tankers. First, the company expects to reduce debt by $146.2 million in the first half of 2023. If day rates remain strong, deleveraging will continue. With improved credit metrics, STNG stock is likely to trend higher.

Further, the company has no new tankers on order and the current liquidity position is $804 million. Even without new tankers in the fleet, growth in day rate would translate into higher free cash flows. Last quarter, the company increased its quarterly dividend from 20 cents to 25 cents. I expect robust dividend growth to sustain, which will result in stock re-rating.

Lithium Americas (LAC)

Lithium Americas (NYSE:LAC) is another undervalued growth stock that could double. To put things into perspective, the company commands a market valuation of $3.4 billion. The company’s Thacker Pass project has an after-tax net present value of $5.7 billion. Of course, the first production is due only in 2026. However, I believe that LAC stock will trend higher to close the valuation gap based on the NPV.

It’s also worth mentioning that the company has assets in Argentina. The Cauchari-Olaroz will commence production in 2023 and can deliver an average annual EBITDA of $308 million. Lithium Americas has a 44.8% stake in this asset. Another positive impending catalyst is the creation of two lithium companies. Lithium Americas will operate the asset in North America. Further, Lithium Argentina will operate assets in Argentina. The split into two entities is likely to result in unlocked value.

Borr Drilling (BORR)

Borr Drilling (NYSE:BORR) stock has been in a consolidation mode after a 40% rally for the year. The provider of jack-up rigs for offshore drilling seems like a good investment opportunity. Even with the pullback in crude oil, BORR has remained resilient. I believe that the stock remains undervalued and is poised for a significant rally.

The first point to note is that Borr has an order backlog of $1.64 billion as of March. Order intake has been robust and the company is poised for stellar revenue and EBITDA growth. To put things into perspective, Borr reported revenue and EBITDA of $443.8 million and $157.4 million in 2022. For the current year, the company has guided for revenue and EBITDA growth of 71% and 141% respectively on a year-on-year basis.

With new orders coming at a higher day rate, EBITDA margin expansion will be robust. Borr is therefore positioned to deleverage and improve its credit metrics. The company has also initiated the process of refinancing 2025 debt maturities.

Aker BP (AKRBF)

Aker BP (OTCMKTS:AKRBF) fell about 20% with lower oil prices. However, I see this correction as a golden opportunity to accumulate the stock. Besides attractive valuations, AKRBF stock has a dividend yield of 8.7%.

If there was a single reason to like Aker BP, it’s low break-even assets. For Q1 2023, the company reported a total income of $3.3 billion. On this, the operating cash flow (after tax) was $1.7 billion with a production cost per barrel at $7.2. Once oil trends higher, Aker BP will be positioned to generate robust free cash flows. I must add that the company has quality assets. The company has guided sustained production growth. In the next few years, investors will therefore benefit from higher realized prices coupled with production upside.

Even with aggressive investment in exploration assets, I expect robust dividend growth. Further, with the company’s leverage at 0.16, there is ample flexibility for potential acquisitions. Aker BP has a record of pursuing inorganic growth.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.