Should you buy these 5 stocks?

What do Crown Resorts Ltd (ASX:CWN), REA Group Limited (ASX:REA), Insurance Australia Group Ltd (ASX:IAG), Challenger Ltd (ASX:CGF) and G8 Education Ltd (ASX:GEM) have in common?

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You are probably thinking the below stocks have been excellent market performers over a long period of time. You would be right! According to Morningstar, each stock has achieved an average annual rate of return of at least 15% over the past five years. What you might not know is that all five companies have underperformed the market considerably since the beginning of 2015.

Crown Resorts Limited (ASX: CWN) has fallen over 20% from its yearly highs after weak consumer sentiment and a Chinese government-led crackdown on gambling on the island of Macau. The company has a strong pipeline of projects on its books including the much anticipated Crown Sydney and is also tendering for new projects including the Queen's Wharf development in Brisbane. Crown is also diversifying its operations through online wagering and gambling. The company is operating in a growing market for gambling and the current share price offers risk tolerant investors a good entry point.

REA Group Limited (ASX: REA) shareholders have seen the share price fall by around 25% since its third quarter results were released in May. Although it reported a 30% increase in EBITDA, the market was unimpressed by a 7.2% decline in nationwide listing volumes. The market may also fear the resurgence of its main competitor Domain. REA Group has always dominated the online property listing space in Australia and is now expanding its business to overseas markets. I believe the market has overreacted and offers investors a rare opportunity to purchase REA Group with a price-to-earnings ratio of less than 27.

Insurance Australia Group Ltd (ASX: IAG) lowered its full year guidance in April based on increased provisions for Cyclone Maria and the severe weather recently experienced in New South Wales. The share price has fallen around 18% since the start of the year and underperformed the general market. The company is attractively priced and offers a dividend yield around 6% but I would be inclined to wait until the price falls further. The insurance business is inherently risky and volatile, making it difficult to forecast earnings.

Challenger Ltd (ASX: CGF) is trading at the same price as it was at the start of 2015. The company controls about 80% of the retail annuity market that provides Australian retirees safe and reliable incomes for their retirement. This sector of the financial industry is expected to grow strongly with Australia's ageing population and Challenger is in a prime position to take advantage of it. The company is valued at 11x FY15 earnings and provides a dividend yield over 4%. This could be a good entry point for long-term investors.

G8 Education Ltd (ASX: GEM) shareholders have had a volatile 2015 so far. The share price dropped 33% from its 2015 high before recovering and then falling again to its current price around $3.70. The market has been concerned about its "roll up" strategy that has provided the company with so much earnings growth in the past. A temporary boost was provided by the recent budget measures aimed at making childcare more affordable but the share price has slowly retreated to pre-announcement levels. G8 Education controls around 4% of a childcare market that is projected to grow each year. With a growing dividend and strong management team, investors should think seriously about G8 Education as a long-term investment.

Foolish takeaway

While buying under-performing stocks is a risky strategy, it often provides investors with exciting opportunities to own companies at a discount that may be great long-term performers. Investors should be positive about the long-term fundamentals of the company but also be comfortable with short-term volatility.

Motley Fool contributor Christopher Georges owns shares in REA Group Limited and G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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