Contrarians are a misunderstood group of investors. Some people consider a contrarian as someone who simply does the opposite of what everyone else is doing.
While that’s true in a sense, they don’t just invest in a company to be in opposition for opposition’s sake – they understand how to analyze the long term potential compared to its current trading price.
There’s one software application company with a depressed stock price that has sank far too low to justify giving contrarians and value investors an opportunity for an outsized profit of more than 80%.
A Deep Value Pick-Up In An Emergent Industry
RingCentral Inc. (RNG) is a $5.5 billion software application developer that provides cloud-based communication services products and services to businesses. It offers a number of various packages that includes office, mobile, fax, webinars, meeting spaces, and more to help businesses stay connected.
The company reported a first quarter earnings beat of $0.39 per share compared to the analysts consensus estimate of $0.34 per share. Net revenues came in on the upside at $468 million as well.
The company’s outlook for the second quarter was upbeat following the report with full year EPS guidance between $1.83 to $1.87 per share.
The biggest catalyst for RingCentral is the growth in the cloud computing industry. Analysts expect the cloud market to grow four-fold in the next six years providing the company with plenty of new opportunities.
RingCentral’s strategy of catering to small businesses and creating partnerships with large telecom companies like AT&T, Verizon, and others should keep profits flowing steadily for years to come.
The stock saw two conflicting analyst reports in May. Oppenheimer upped its recommendation from “perform” to “outperform” and gave it a price target of $100 per share while Robert W. Baird downgraded the stock from “outperform” to “perform” and the price target lowered from $95 per share to $80 per share.
The Fundamental Side
The stock trades like a growth stock at 44 times earnings compared to the software industry average of 35 times earnings.
The long term projected EPS growth rate of 35% gives it a PEG ratio of less than 2 however – a good sign that the stock is actually undervalued at these prices.
The stock does carry a short interest float of 9.5% which could act against bullish movements, but may also provide investors with a short-squeeze opportunity if the bullish momentum picks up.
The Technical Side
RingCentral’s chart doesn’t seem to have much positivity in it at first glance. The steady downward trend is reflected in the 20-day SMA hovering below the 50-day and 200-day SMAs, but it appears to have hit a bottom within the past couple of weeks.
The new sideways trading activity also shows some relatively weak, but still bullish, hammer patterns.
The stock is also oversold with an RSI of 31 which suggests that a bullish reversal is likely to happen over the next week or so.
The Bottom Line
Based on RingCentral’s full year EPS estimates, this stock should be fairly valued at around $120 per share – a staggering gain of more than 84% from its current trading price.
Contrarians and value investors alike will appreciate the enormous potential gains in this discounted stock.
The above analysis of RingCentral Inc. (RNG) was provided by financial writer Daniel Cross.
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