Wall Street Has Given Up on These 3 Stocks, and That's a Huge Mistake

A Wall Street street sign.

Investing in stocks that have been cast aside by the market can be a lucrative strategy -- as long as you're careful. Some stocks get beaten down for good reason, but others don't deserve all the scorn heaped upon them. Fortunately, a market overreaction is a value investor's best friend.

A few of our Motley Fool contributors have identified three stocks that have been unduly knocked down. Here's why bargain-hunting investors should take a look at Bed Bath & Beyond (NASDAQ: BBBY) , Hanesbrands (NYSE: HBI) , and A.O. Smith (NYSE: AOS) .

This retailer could be poised for a rebound

Sean Williams (Bed Bath & Beyond): There aren't many stocks loathed by Wall Street as much as home furnishings retailer Bed Bath & Beyond. Shares of the company are down 44% this year and a whopping 83% over the trailing five-year period.

Why the poor performance? Look no further than increasing competition from online juggernauts like (NASDAQ: AMZN) , as well as weakness from its brick-and-mortar stores. According to the company's most recent quarterly operating results, it expects to see a decline in earnings per share this year and next year. In fact, the company's full-year EPS could wind up falling from $5.10 in 2016 to an estimated $1.65 by 2019.

While there's little denying that Bed Bath & Beyond has issues to fix, I don't believe it's a lost cause. If it were to follow a path similar to Best Buy 's (NYSE: BBY) , Bed Bath & Beyond could be thriving again within two or three years.

For starters, this is a company that's going to be focused on technology and cost controls. It's aiming to free up its merchandisers so they can seamlessly supply its brick-and-mortar and online stores from one network.

Just as intriguing, Bed Bath & Beyond will be utilizing dynamic pricing online and in select stores to be more competitive with the likes of Amazon. This dynamic pricing won't simply be a one-size-fits-all platform. Rather, it'll tackle core, competitive, and markdown pricing, and do so on a more local level than any of the company's previous pricing strategies. Best Buy did something just like this in February 2013 when it announced it would tackle showrooming with price matching online and brick-and-mortar retailers, and it's been on the comeback trail ever since.

Bed Bath & Beyond is also focused on growing its online business. Though it still represents a small percentage of sales, it's growing strongly and could be a needle mover by the turn of the decade.

With Bed Bath & Beyond expected to return to EPS growth in 2020 and trading for less than eight times Wall Street's fiscal 2020 EPS, investors shouldn't overlook it.

Left for dead

Tim Green(Hanesbrands): Shares of apparel manufacturer Hanesbrands have been sent through the wringer this year. The stock is down more than 40% year to date, and it's lost more than 30% of its value in the past three months alone. There's been some bad news driving some of this decline, but it all looks like a massive overreaction to me.

Hanesbrands suffered a blow earlier this year when retailer Target decided to drop its contract for C9 by Champion , an exclusive line of athletic wear provided by Hanesbrands Champion brand. When the current contract ends in 2020, a $380 million revenue hole will need to be filled. Hanesbrands is still expecting Champion to be a key growth driver despite this setback, with rapid growth expected outside the mass channel.

On top of the Target news, the bankruptcy of Sears Holdings as well as negative currency trends forced Hanesbrands to slightly reduce its full-year outlook. That development was timed with the start of the ongoing stock market correction, a double whammy for an already beaten-down stock.

After the steep decline, Hanesbrands now trades for just 7.3 times the midpoint of its full-year adjusted earnings guidance. That seems overly pessimistic to me. The market has all but given up on the stock, but bargain hunters should take notice.

China woes overshadow other positives

Tyler Crowe (A.O. Smith): One unlikely company that has found itself in the crosshairs of the U.S.'s current trade disputes is water heater manufacturer A.O. Smith. Its material costs increased due to steel tariffs, and China's slowdown has adversely impacted its largest growth market. The company's most recent earnings results were a clear sign that tariffs and trade wars were having an impact on the bottom line . These concerns also have Wall Street spooked, as shares of A.O. Smith are down 30% year to date.

As bad as that sounds, this seems like a market overreaction for an otherwise great business. One thing that investors can routinely rely on is that A.O. Smith's North American business segment is an incredibly reliable cash generator. More than 80% of North American sales are for replacements rather than new construction, and replacing a busted water heater isn't a purchase many people elect to put off. This stable portion of the business is why management was able to announce a 22% dividend increase just weeks before the discouraging earnings report.

Another thing to consider is that China isn't the company's only growth opportunity. Management is deploying a similar playbook in India to capture a similar trend of a populous country with a burgeoning middle class. Its Indian sales push is in a very early stage, but some impressive numbers there could ease a lot of investor concerns about China.

After this year's price drop, shares of A.O. Smith trade at a price-to-earnings ratio of 21.7. That doesn't sound like a screaming bargain, but it's close to the cheapest valuation for the stock over the past five years. It's hard to say what Wall Street will think of A.O. Smith's stock over the next several months with tariffs and trade still looming, but this looks like one of the more opportune times to jump into this stock.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. Timothy Green owns shares of Hanesbrands. Tyler Crowe owns shares of A. O. Smith. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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