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3 underperforming ASX 200 stocks that could beat earnings expectations

Getting through this reporting season is akin to tiptoeing through a field of landmines. Perhaps one good way to get through the reporting season is to back ASX stocks that are underperforming the market.

This is because expectations are set pretty low for these S&P/ASX 200 Index (Index:^AXJO) laggards when the same can’t be said for the market in general.

Some experts are warning of a painful correction as profit results are unlikely to sustain the rapid recovery in the ASX 200 since it hit a COVID-19 low back in March.

Seeds of a turnaround recovery

One stock that’s weighed down by bad news is the Nufarm Limited (ASX: NUF) share price. Shares in the crop protection and seed distributor fell nearly 30% since the start of calendar 2020.

A series of disappointing profit updates robbed confidence from the stock, but it may be at a point where sentiment is worse than reality.

UBS believes it’s Nufarm’s troublesome European business that’s dragging on stock and that the worst is likely behind the group when it upgraded Nufarm to “buy” recently.

I also believe that the market is pricing in very little upside for its newly launched omega-3 infused canola seeds.

Management said today that Canadian authorities have granted the group permission to sell the seeds in that country.

Further, easing drought conditions in Australia should mean that we will start seeing better results in Nufarm’s local business.

The company is expected to report its full year results in late September.

Down but not out

Another dog that might be worth betting on is the Downer EDI Limited (ASX: DOW) share price. Shares in the engineering and industrial services group nearly halved since January.

Fears that it will need to raise capital and the earnings hit from fallout from COVID-19 on its hospitality business prompted investors to shun the stock.

It turned out that the market was right about the capital raise with management tapping investors on the shoulder for $400 million.

There’s also slightly more confidence about the outlook for the economy in the post COVID-19 world.

This could be the right time to get back into this heavily discounted stock, particularly after Goldman Sachs upgraded Downer to “buy” yesterday.

“All-in we view DOW as an attractive defensive complement to our more resource-focused E&C coverage, with the company among the most recession-resilient in the case of an uneven macro/commodity recovery coming out of COVID,” said Goldman.

“We believe the stock’s valuation fails to reflect this defensive profile.”

Looking cheap with a strong balance sheet

Finally, I think the CSR Limited (ASX: CSR) share price is also looking interesting after its 23% fall in 2020.

Worries about housing construction falling off a cliff during the coronavirus turmoil looks overblown to me when federal and state governments are pumping stimulus into the sector.

Management also impressed me when it handed in their full year earnings report card in May, which was ahead of market expectations.

CSR also has a strong balance sheet with around $95 million in cash to buffer it from the uncertain industry outlook.

The building materials company will report its half year numbers in November.

These 3 stocks could be the next big movers in 2020

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. Connect with me on Twitter @brenlau.

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 Scott Phillips.

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