The Hidden Gem Hotlist: 3 Under-the-Radar Stocks With Breakout Potential

Stocks to buy

Too often, investors will focus on the banner names in the news, buying stocks that have already received accolades. While running with a winner isn’t a bad strategy, it often misses the bigger opportunities with under-the-radar stocks hidden in plain sight.

Looking for under-the-radar stocks that represent a good opportunity without having to run the risk of buying penny stocks might be an excellent way to juice your portfolio’s returns. The three companies below are such out-of-the-way investments offering breakout potential and should be considered a buy.

ExlService Holding (EXLS)

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A virtually unknown artificial intelligence (AI) stock ready for a breakout is ExlService Holding (NASDAQ:EXLS), a hidden gem of a data analytics company. While more prominent Big Data AI stocks like Palantir Technologies (NYSE:PLTR) grab all the headlines, ExlService is smartly growing behind the scenes.

The contrast is stark. Palantir Technologies recently turned profitable, notching six consecutive quarters of GAAP earnings, while ExlService has been churning out growing profits for over a decade. Revenue has also tripled since 2013, growing from $478 million 10 years ago to over $1.6 billion last year. Palantir had $608 million in sales last year.

ExlService Holding targets key industries, primarily insurance, healthcare, banking and financial services. According to a recent note from Citi analysts, data and AI-powered operations account for 51% of total revenue and have grown at a compounded rate of 32% annually since 2020.

EXLS stock trades at just 15 times next year’s earnings estimates, with Wall Street forecasting 15% annual long-term profit growth. At less than twice its sales, ExlService Holding is an under-the-radar stock with substantial breakout potential.

Ulta Beauty (ULTA)

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Beauty products and personal care leader Ulta Beauty (NASDAQ:ULTA) is not a hidden gem in the traditional sense of the meaning. However, as retail comes under increased pressure from high inflation and high interest rates, Ulta possesses significant breakout potential. It is poised to report fiscal first-quarter earnings, and regardless of which way they go, investors should be alert to the opportunity.

Data from location intelligence data specialist Placer.ai shows that Ulta Beauty still excels while the broader beauty and wellness segment is suffering from a slowdown in consumer visits. The year-over-year growth may have moderated, but it continues to perform ahead of itself and the industry. Placer.ai’s Bracha Arnold notes, “The beauty giant continues to thrive — drawing even more visitors in early 2024 than during the equivalent period of last year.”

Ultra Beauty should continue outperforming, too. Cosmetics and other beauty care products are affordable indulgences. Even during recessions, consumers will splurge on such products when they can’t afford more expensive purchases. There’s even a name for it: the Lipstick Effect.

As the Federal Reserve balks at cutting interest rates because of inflation’s stubborn tenacity, look to Ulta Beauty to outperform expectations over time.

Koppers Holdings (KOP)

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Supplying crossties to railroads and telephone poles to utilities doesn’t sound like an especially exciting business, but that makes Koppers Holdings (NYSE:KOP) such a hidden gem.  The recent earnings miss and subsequent 20% drop in this under-the-radar stock allows investors to buy in before the rebound breakout.

The miss was due to business in some of its segments being slower than even management anticipated. Some of that was due to projects getting delayed due to grants not being as quickly deployed as expected, but business will ultimately materialize. Moreover, a recent acquisition provides some near-term earnings pressure even as it provides long-term growth opportunities.

Before the earnings miss, Koppers Holdings had been up 65% for the past year, triple the gains of the S&P 500. While that’s since narrowed, the telephone and railroad tie company still leads. Shares trade at just 8 times earnings estimates, a fraction of sales and well below estimated long-term earnings growth rates. It makes Koppers an excellent candidate for a breakout performance once business gets back on track.

On the date of publication, Rich Duprey 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.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

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