In this article, we discuss the 10 best undervalued stocks to buy now along with the expert opinion on the future growth prospects of the US economy.
Demographic Shifts and AI Innovation: A Bullish Case For the US Market
In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.
On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today’s market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.
In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.
Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.
Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.
10 Best Undervalued Stocks To Buy Now
Our Methodology
For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Undervalued Stocks To Buy Now
10. Royalty Pharma plc (NASDAQ:RPRX)
Forward PE as of June 24: 7
Number of Hedge Fund Holders: 37
Royalty Pharma plc (NASDAQ:RPRX) buys biopharmaceutical royalties and funds innovations in the biopharma industry in the U.S. The company also identifies, evaluates, and acquires royalties on different biopharmaceutical therapies. According to our database, 37 hedge funds held stakes in the stock in the first quarter, with positions worth $1.27 billion. With a position valued at $348.816 million, Viking Global is the largest shareholder of the company, as of March 31.
On May 9, Royalty Pharma announced the acquisition of royalties and milestones on frexalimab owned by ImmuNext, Inc. for approximately $525 million. With this acquisition, Royalty Pharma will gain access to a promising next-generation immunology therapy developed by Sanofi (NASDAQ:SNY). Frexalimab is a second-generation anti-CD40 ligand monoclonal antibody and it is currently in advanced stages of development, with three Phase 3 clinical studies underway for multiple sclerosis (MS) and ongoing Phase 2 studies for systemic lupus erythematosus and Type 1 Diabetes.
The potential market for frexalimab is substantial as Sanofi projects non-risk-adjusted peak sales exceeding €5 billion across multiple diseases, including MS. In 2023, MS therapies alone generated approximately $25 billion in global sales which highlights an ideal opportunity for frexalimab if approved. From a financial perspective, Royalty Pharma stands to gain full royalties on frexalimab’s sales up to $2.0 billion per year. Beyond this threshold, they will share a portion of the royalties with ImmuNext shareholders. This approach allows Royalty Pharma to directly benefit from the success of frexalimab in the market. It ensures that it capitalizes on its commercial potential while also spreading risk through shared royalties for sales exceeding $2.0 billion annually.
With this acquisition, Royalty Pharma’s broad development-stage pipeline now comprises 15 therapies with blockbuster potential across various therapeutic areas. These therapies are supported by strong clinical data and partnerships with leading global marketers show the company’s ability to identify and capitalize on emerging biopharmaceutical innovations.
As of June 24, Royalty Pharma is trading at 7x its estimated 2024 earnings, a significant discount from its industry average of 21x. The company’s long-term growth catalysts and low valuation make quite a compelling bullish case for investors, making it one of the best-undervalued stocks to buy.
Patient Capital Management stated the following regarding Royalty Pharma plc (NASDAQ:RPRX) in its fourth quarter 2023 investor letter:
“We built up a position in Royalty Pharma plc (NASDAQ:RPRX) during the quarter. Royalty Pharma is the largest buyer of biopharmaceutical royalties. The stock traded down throughout 2023 hitting a low of $26.21 in October below its IPO price of $28 in 2020 despite revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) being materially higher. The company is in the business of buying royalties, originally funded by debt with profits recycled into new opportunities. As interest rates rose throughout the year, the stock came under pressure as fears of a smaller spread between royalty deal IRRs and the cost of capital hit the stock. This fear looks overblown with only 21% of current debt being variable and the majority of its fixed rate debt not due until after 2030. With an average cost of debt of 5% and 2023 deal internal rates of return (IRRs) averaging low teens, we believe the model still works. This environment has only served to grow the total addressable market. Run by a proven business leader, we believe the company can continue to invest at attractive spreads. Trading at just 8x earnings, we believe you are getting an attractive entry point to own a leader in the space.”
