2 'unpopular stocks' to buy before they catch fire

Investors are crossing the street to avoid these ASX shares, but Firetrail's Blake Henricks reckons that's why it's time to add them to the portfolio.

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Firetrail portfolio manager Blake Henricks loves what he calls "uncomfortable opportunities".

That is, in order to buy truly cheap shares, one needs to identify ASX stocks that others have abandoned but are representing businesses that have upside.

And there is one prominent theme right now that can help investors find such ASX shares.

"You can make a lot of money buying unpopular stocks," he told the audience at the Pinnacle Summit in Sydney this week.

"We actually think it's time for old-world assets."

That is, while innovations like artificial intelligence, cancer treatments and electric cars capture the imagination of the market, companies providing conventional products and services are being ignored.

Many of those "old world" businesses will still see plenty of demand for their product, and will see earnings head up.

But the share price could be massively discounted right now, allowing a cheap entry point.

Here are two examples of such cheap shares that Henricks mentioned:

Simple formula: sell more pizzas

Henricks admits Domino's Pizza Enterprises Ltd (ASX: DMP) has had a horrible time lately, with the share price plunging 67% from its September 2021 peak.

"It went from a huge COVID winner to a big inflation loser," he said.

"Their food cost went up, their labour cost went up… Seven [earnings] downgrades in two years. Terrible time."

Some of the hurt was self-inflicted, like when Domino's introduced a service surcharge to combat some of the supply inflation.

That fee led to customers abandoning the pizza outlet, and the company was forced to backflip.

Created with Highcharts 11.4.3Domino's Pizza Enterprises PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

But now that the stock is well discounted, Henricks feels like it's a ripe "uncomfortable opportunity".

His optimism comes from the fact that Domino's is a volume business. 

And with its takeaway restaurants inexpensive to create, it keeps expanding its store network. 

That leads to more pizzas sold.

"They've gone from 500 stores in 2010 to 3,795 [now]."

The Firetrail team believes store growth eventually will return to 7% per annum, per-store sales will grow at 3% each year, and 10% revenue growth per year.

Explosives supply-demand equation about to turn

Incitec Pivot Ltd (ASX: IPL) is also a bit of a hot mess right now, losing its chief executive earlier this year.

The share price is down almost 25% since its peak last December.

Falling fertiliser prices and factory outages have not helped the cause.

However, it's now a top-five position in Firetrail's High Conviction fund.

According to Henricks, the market is yet to fully appreciate the potential the business possesses.

The company traditionally consisted of a US fertiliser arm worth $1.9 billion, an Australian fertiliser business valued at $1.4 billion and a $5.2 billion explosives division.

Incitec Pivot is currently executing a "radical simplification" of this structure. The US fertiliser business has been sold off, and the Australian fertiliser arm is receiving takeover bids.

Created with Highcharts 11.4.3Dyno Nobel PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

"People see value in these old-world assets," he said.

"So what we're left with is a pure-play explosives business."

And that is one very attractive industry, according to Henricks, despite an oversupply of explosives for the mining industry since 2015.

"How many explosives plants have been built in Australia since 2016?" he said.

"Zero. What we see here is a very large shortfall in the amount of explosives available in the Australian market."

In fact, the Firetrail team estimates this deficit to start as soon as next year, with a 7% shortfall predicted by 2027.

"You probably think we can just import it. We can, but it's not a great solution," said Henricks.

"Explosives don't travel well. And in addition, the largest supplier globally of explosives [is] Russia."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Domino's Pizza Enterprises. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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