Returns From This Trio Were Lackluster in 2024. But These 3 Undervalued Stocks Are Among My Highest-Conviction Ideas for 2025

With just three weeks left in the year (as of this writing), the S&P 500 is up nearly 27% in 2024. To illustrate how great this gain is, if someone invested $10,000 and gained 27% annually, they'd have over $100,000 in just 10 years. In short, 2024 was a great year to earn merely "average" stock market returns.

But, alas, not all stocks are performing as well as the average for the stock market. This includes shoe company Crocs (NASDAQ: CROX), sporting goods retailer Academy Sports and Outdoors (NASDAQ: ASO), and display technology company Universal Display (NASDAQ: OLED). All three are underperforming the S&P 500 in 2024, and two of them have actually lost money for investors this year.

^SPX data by YCharts.

This trio has provided investors with lackluster returns in 2024. But I believe 2025 will be quite different. Here's why.

1. Crocs

Crocs is a cheap stock, trading at just 8 times earnings whereas many stocks trade at over 20 times earnings. But whether Crocs stock is also undervalued has a lot to do with the sustainability of its profits and how management uses cash. After all, Crocs wouldn't be a good investment if profits plunged in the future or capital was mismanaged. But there's good reason for optimism here.

Crocs owns the HeyDude shoe brand, but 80% of the business is still the Crocs brand. This core brand is still growing, with 8% year-over-year revenue growth expected this year. Moreover, profit margins for this brand are stable, which allows the company to earn plenty of operating income.

Regarding its use of cash, Crocs took on loads of debt when it acquired HeyDude, but it's already paid back more than $1 billion over just the past two years. Now that its debt is getting more under control, it's started repurchasing shares at these cheap levels.

I believe Crocs can be a good performer on the strength of its core brand alone. The HeyDude brand is admittedly performing quite poorly, with a 15% drop in revenue expected this year. But if management can turn things around for HeyDude, then this will be the icing on the cake for an already attractive opportunity.

2. Academy Sports

Also trading at about 8 times earnings, Academy Sports stock is as cheap as Crocs stock. I believe Crocs can perform well by simply maintaining its current level of business, and the same could be true of Academy Sports as well. That said, Academy Sports stock is positioned for much better growth, making the long-term opportunity even more attractive.

Academy Sports attempts to differentiate itself from competitors by offering more localized merchandise as opposed to merchandise with broader appeal. The strategy appears to be working. In 2023, its stores generated $22 million in sales on average, far outpacing peers. Moreover, its net profit margin has improved to over 7%, whereas its profit margin was lower than 2% five years ago.

It only has about 300 stores today, but Academy Sports is aiming for more than 800 locations in the long term. In 2025, management plans to open up to 25 new stores, which is almost 8% growth. Of course, there are a lot of important details here. But at the risk of oversimplifying things, the company's profits should also be higher in 2025, thanks to these new locations. Since the stock is already cheap, I believe these higher profits will push shares higher next year.

Profitability is such an important thing for investors in the long term, not just with Academy Sports but for Crocs as well. Both companies are paying down debt fast, and both are repurchasing shares, as the two-year chart below shows. These two stocks might not necessarily go up in 2025 -- predicting the timing is tough. But this combination of debt reduction and stock buybacks will likely provide a big boost sooner or later.

CROX Total Long Term Debt (Quarterly) data by YCharts.

3. Universal Display

Many people own an electronic device with an organic light-emitting diode (OLED) display. The technology isn't new. But Universal Display has a competitive advantage in the space with over 6,000 patents, and it's one breakthrough away from kicking off a new lucrative cycle in the space.

Technology hardware companies -- particularly those that make mobile devices -- are interested in extending battery life more than anything. It's a problem as mobile devices become more powerful. That's why they turn to OLED technology in the first place. First and foremost, it's more energy-efficient.

Through licensing its technology and selling the materials, Universal Display is a high-margin business with a net-profit margin of 37%. Management plows a lot of cash into research and development to stay in front of competition. Right now, it's working on the next iteration of OLED tech, called phosphorescent OLED, or PHOLED.

Universal Display needs three primary colors to make its displays work: Red, green, and blue. It already has PHOLED red and green. But PHOLED blue has been a hard challenge to overcome. Management had hoped to have it this year but ultimately couldn't make it happen. But management says it's "very close" to commercialization.

According to Universal Display's management, PHOLED blue alone will make its displays 25% more energy-efficient, making them a no-brainer upgrade for device manufacturers. I don't think it's unreasonable to expect the technology for blue to be ready in 2025, unlocking fresh growth for the business.

At over 30 times earnings, I'm not necessarily saying that Universal Display stock is cheap. I do nevertheless believe it's undervalued (there's a difference) when considering the long-term potential as adoption of its products soars in future years.

Here's to 2025

Crocs, Academy Sports, and Universal Display are among my highest-conviction investment ideas for 2025. I believe all three could do very well, and I believe the downside risk is low in each case. My conviction is based on the strengths of the businesses and the belief that each stock is undervalued.

Stocks can be underappreciated and consequently undervalued for years. Therefore, it's possible that shares of Crocs, Academy Sports, and Universal Display will all underperform again next year even if the businesses do well. That's fine with me. Investing is about the long term. And I feel good about these businesses for the next five years, at least.

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Jon Quast has positions in Academy Sports And Outdoors and Crocs. The Motley Fool recommends Academy Sports And Outdoors, Crocs, and Universal Display. The Motley Fool has a disclosure policy.