In this piece, we will take a look at 10 undervalued cyclical stocks to buy according to analysts.
Economic growth in the U.S. surpassed forecasts in the second quarter, driven by robust consumer demand and increased government expenditure. The real gross domestic product, a measure of all goods and services produced, grew at an annualized rate of 2.8%, beating consensus estimates of 1.4%. It also significantly improved from the 1.6% GDP growth recorded in the first quarter.
Nevertheless, the economy has slowed in the year’s second half due to disappointing economic data. Private sector payrolls grew at the weakest pace in more than 3½ years in August, providing yet another sign of a deteriorating labor market, according to ADP. The weakness is a concern, especially for cyclical companies that experience the largest fluctuations in sales and profits as the economy strengthens or weakens.
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Since August was the weakest month for job growth since 2011, there are growing concerns that the U.S. economy is cooling off. Early indication is that hiring has slowed from the blistering pace following the COVID pandemic. Such weakness could spell more doom to cyclical companies in the materials, restaurant, and consumer food segments as prospects depend on consumers’ purchasing power.
Jamie Dimon, the Chief Executive Officer JPMorgan, is not ruling out stagflation even as the Fed cuts interest rates to try and support the economy. Dimon is concerned that a wave of inflationary pressures is approaching, including greater deficits and more spending on infrastructure, which will keep adding strain to an economy that is still recovering from the effects of rising interest rates. In August, he mentioned that the chances of a “soft landing” were estimated to be between 35% and 40%, suggesting that a recession is the more probable scenario.
Weak employment figures for July raised concerns that the U.S. economy might be on the verge of a downturn, sending the stock market lower. Likewise, August employment numbers sent the U.S. equity market a lower kick, starting the worst months for stocks.
While Fundstrat’s equity strategist, Tom Lee, expects the stock market to run into some turbulence on valuation levels getting out of hand, he expects pullbacks to present some of the best buying opportunities. Lee expects up to 10% pullbacks as investors navigate one of the most important months for stocks.
While the analyst believes investors should be cautious over the next eight weeks, it might be one of the best times to pay attention to undervalued cyclical stocks to buy. Cyclical stocks are poised to receive a significant boost on the U.S. Federal Reserve cutting interest rates in a bid to prevent the economy from plunging into recession.
While Lee believes the uncertainty over the U.S. election could add to the layer of uncertainty, any up to 10% pullback would provide an ideal entry-level, especially for value cyclical stocks.
In an interview with CNBC, Carl Weinberg, Chief Economist at High-Frequency Economics, reiterated it would take much more than the current weakness in the economy for the Fed to trigger a panicked 50 basis point rate cut. Nevertheless, any panic that comes into play with the Fed cutting by more than 25 basis points would present an opportunity to continue holding the best cyclical stocks that remain resilient amid such uncertainties.
Our Methodology
For this article, we scoured through Yahoo Finance stock screener to find stocks in all the cyclical sectors with price-earning ratios of under 15. Next, we shortlisted our list to 10 stocks with Buy or better ratings with the highest average analyst price targets on September 11. The analyst ratings were taken from TipRanks, and the stocks are listed in ascending order based on their average price target upside potential.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. 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 Undervalued Cyclical Stocks to Buy According to Analysts
10. Alibaba Group Holding Limited (NYSE:BABA)
Forward PE ratio as of September 11: 9.69
Average Analyst Price Target Upside Potential: 32.03%
Number of Hedge Fund Holders: 91
Alibaba Group Holding Limited (NYSE:BABA) is an internet retail giant that provides technology infrastructure and marketing reach to help merchants connect with customers. It also operates a cloud platform that offers cloud computing services and marketing and advertising services.
There is no doubt that Alibaba has underperformed in the market after peaking in 2020 at $306 a share. The underperformance has come on the company facing a myriad of issues not limited to stringent competition, slowing Chinese economy, and geopolitical tensions. Nevertheless, Alibaba has remained resilient and is the biggest Chinese internet retail giant.
Despite stiff competition, Alibaba Group Holding Limited (NYSE:BABA) controls 46% of China’s internet retail space, meaning more customers are shopping on its online platforms.
The company delivered solid first-quarter results that affirmed robust growth in its core e-commerce business and artificial intelligence. The momentum continued in the second quarter, affirming why it is one of the undervalued cyclical stocks to buy, according to analysts. E-commerce remains the company’s bread and butter as it generated $34 billion in revenues, up 4% in the June quarter, with a net income of $3.4 billion.
At the same time, Alibaba Group Holding Limited (NYSE:BABA) ‘s global e-commerce ventures, like Lazada and Aliexpress, remain a strong area, experiencing a 32% increase in sales compared to the previous year in the international online shopping sector. Alibaba’s quarterly revenues from its cloud division reached 26.5 billion Yuan, marking a 6% increase compared to the previous year, achieving the quickest expansion since the third quarter of 2022.
The company increasingly invests in artificial intelligence and offers A.I. solutions through its cloud division. Revenue from AI-related products saw a year-over-year growth rate of over 100% in the June quarter, affirming why it is one of the best undervalued cyclical stocks to buy, according to analysts for A.I. exposure. Alibaba Group Holding Limited (NYSE:BABA) stock trades cheaply with a price-to-earnings multiple of 9 and a price-to-sales (P.S.) multiple of 1, signaling potential undervaluation.
Alibaba stock currently commands an average buy rating on Wall Street with an average price target of $109.53, implying a 32.03% upside potential.
By the end of Q2 2024, 91 hedge funds held stakes in BABA, totaling $3.81 billion. As of June 30, Appaloosa Management LP was the largest shareholder, with a position valued at $756 million.
Here is what O’keefe Stevens Advisory said about Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
9. Carnival Corporation & plc (NYSE:CCL)
Forward PE ratio as of September 11: 10.09
Average Analyst Price Target Upside Potential: 34.08%
Number of Hedge Fund Holders: 53
Carnival Corporation & plc (NYSE:CCL) is a travel service company that provides leisure travel services. It offers its services under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn. It also operates port destinations, private islands, and a solar park and owns and operates hotels and lodges.
It is one of the top undervalued cyclical stocks to buy, according to analysts, having raised its annual profit forecast for the year for the second time, signaling booming business. With 2024 emerging as a record year for cruise operators, Carnival Corporation & plc (NYSE:CCL) is one of the companies reaping big as booking volumes hit all-time highs as travelers continue to seek out newer experiences and fun activities.
In the second quarter, the company’s total customer deposits hit an all-time high of $8.3 billion, beating the previous record by $1.1 billion. Consequently, the company delivered a quarterly profit of 7 cents per share and 11 cents per share on an adjusted basis. The company’s operating income was nearly five times higher in Q2 than in the prior-year period.
Carnival Corporation & plc (NYSE:CCL) now expects 2024 adjusted profit per share of about $1.18, compared with its earlier forecast of 98 cents.
While the company boasts a massive debt portfolio of $27.7 billion, it is increasingly paying it out. In the second quarter, it paid off $6.6 billion of its debt, affirming its financial stability. Having amassed a staggering $8.3 billion in client deposits for upcoming trips, it now boasts robust reservations as people head back to the ocean for their daring getaways. Likewise, the stock appears to be trading at a discount with a price-to-earnings multiple of 9.
As per Insider Monkey’s Q2 2024 database, 53 hedge funds reported owning stakes in Carnival Corporation & plc (NYSE:CCL). These were valued at $2.06 billion. On the other hand, 15 analysts on Wall Street maintain a buy rating on the stock with an average price target of $21.64, implying a 34.08% upside potential.
8. Las Vegas Sands Corp. (NYSE:LVS)
Forward PE ratio as of September 11: 13.51
Average Analyst Price Target Upside Potential: 34.29%
Number of Hedge Fund Holders: 40
Based in Las Vegas, Nevada, Las Vegas Sands Corp. (NYSE:LVS) and its subsidiaries are crucial players in the resorts and casinos business; it operates integrated resorts in Macao and Singapore. Some of its high-profile brands include The Venetian Macao Resort Hotel, the Londoner Macao, The Parisian Macao, The Plaza Macao, and Four Seasons Hotel Macao.
Las Vegas Sands Corp. (NYSE:LVS) is one of the undervalued cyclical stocks to buy, according to analysts, as the company is increasingly benefiting from a booming resorts and casinos business. Financial and operating results in the second quarter underlined growth in both Macao and Singapore compared to the second quarter of 2023.
Net revenue in the quarter totaled $2.76 billion compared to $4.54 billion in the prior quarter, as Net income came in at $424 million, up from $368 million as of Q2 of 2023. The company exited the quarter with unrestricted cash balances of $4.71 billion.
Solid financial position and industry-leading cash flow support Las Vegas Sands’ investment and spending plans in Macao and Singapore in pursuit of new opportunities for growth and shareholder value.
Las Vegas Sands Corp. (NYSE:LVS) returns excess capital to shareholders, repurchasing a $400 million share in the second quarter. While trading at a price-to-earnings multiple of 13, the company rewards investors with a solid 2% dividend yield, underlining why it is one of the best undervalued cyclical stocks to buy, according to analysts.
Hedge fund sentiment toward Las Vegas Sands Corp. (NYSE:LVS) turned negative in the second quarter of 2024, with the number of hedge funds holding positions in the stock dropping to 40 from 52 in the first quarter. Viking Global is the most dominant shareholder in the company as of Q2 of 2024. In the quarter, the firm increased its stake by 17% to 19.79 million shares worth $875.51 million.
Las Vegas Sands is currently rated as a Buy based by 14 Wall Street analysts with an average price target of $52.75, implying 34.29% upside potential.