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.
7. Li Auto (NASDAQ:LI)
Forward PE ratio as of September 11: 8.98
Average Analyst Price Target Upside Potential: 36.48%
Number of Hedge Fund Holders: 17
Li Auto Inc. (NASDAQ:LI) is one of the best undervalued cyclical stocks to buy, according to analysts, to gain exposure in the Chinese auto manufacturing business. It is one of the automakers spearheading the electric vehicle revolution in China.
The Chinese electric car manufacturer reported stronger-than-anticipated earnings for the second quarter and offered optimistic forecasts, indicating solid growth despite the evolving market conditions in the electric car industry.
The firm recorded earnings per share (EPS) of RMB1.42 ($0.20), exceeding the expectations of RMB1.33 set by analysts. Its sales increased by 10.6% year over year to RMB31.7 billion ($4.4 billion), meeting the forecast of RMB31.52 billion.
Li Auto Inc. (NASDAQ:LI) managed to sell 108,581 vehicles in the second quarter, marking a 25.5% increase compared to the same period in the previous year. Nonetheless, the profit margin on vehicles fell to 18.7% from 21.0%, mainly because of shifts in the product lineup and pricing approaches.
Li Auto Inc. (NASDAQ:LI) is one of the top cyclical stocks to pay attention to as the company is seeing strong demand for its cars. It expects to deliver between 145,000 to 155,000 vehicles, representing 38.0% to 47.5% Yoyo growth. Revenue in the third quarter is projected to increase by between 13.7% and 21.6%.
As a growth strategy, the company also plans to introduce multiple 800-volt high-voltage pure electric vehicles next year. It is in a solid financial position with a strong cash position of RMB97.3 billion and is on course to deliver over 500,000 cars by the end of the year. Additionally, Li Auto trades at a discount with a price-to-earnings multiple of 8.
The number of hedge funds holding Li Auto Inc. (NASDAQ:LI) dropped from 29 to 17, reflecting a decline in interest among hedge funds. However, Li Auto is a cyclical stock rated as a Buy with an average price target of $26.82, implying 36.84% upside potential from current levels.
6. Aptiv PLC (NYSE:APTV)
Forward PE ratio as of September 11: 8.79
Average Analyst Price Target Upside Potential: 38.13%
Number of Hedge Fund Holders: 38
Aptiv PLC (NYSE:APTV) is a company that designs, manufactures, and sells vehicle components. It also provides electrical, electronic, and safety technology solutions to the automotive and commercial vehicle markets. The company also develops innovative solutions that enhance the safety, environmental sustainability, and connectivity of transportation.
It is one of the best undervalued cyclical stocks to buy, according to analysts, as it is one of the companies ushering in the next generation of active safety autonomous vehicles. Even though there was a decrease in spending on electric vehicles (E.V.) and sophisticated driver-assistance technologies (ADAS) areas, Aptiv PLC (NYSE:APTV) reported its highest profits for the second quarter of 2024, even though its revenue fell by 2%.
Revenue in the second quarter totaled $10 billion as net income totaled $1.16 billion, leading to a net income margin of 11.6%. This achievement was mainly because of strong performance and lower expenses related to the supply chain.
Aptiv PLC (NYSE:APTV) is trading at low earnings multiple, with an adjusted P/E ratio of 9, suggesting that the stock might be undervalued relative to its earnings capacity. Likewise, the company has already confirmed a $5 billion buyback program as part of an effort to return value to shareholders.
In the second quarter, 38 hedge funds held long positions in Aptiv PLC (NYSE:APTV), with a combined stake value exceeding $1 billion. Impax Asset Management was the largest shareholder, owning 6.23 million shares. Based on 15 Wall Street analysts, Aptiv commands an average buy rating and a $90.31 price target implying, 38.13% upside potential.
ClearBridge Investments mentioned Aptiv PLC (NYSE:APTV) in its first-quarter 2024 investor letter. Here is what it said:
“Stock selection in the consumer discretionary sector was the leading detractor from relative performance, driven by idiosyncratic issues within a handful of holdings. Automotive parts supplier Aptiv PLC (NYSE:APTV) faced pressure as headwinds to the broader auto-cycle and a slowing in electric vehicle adoption weighed on margins. However, we believe that the company’s above-market growth, combined with opportunity for margin expansion, are compelling at its current valuation as the auto-cycle rebounds.”
5. Yum China Holdings, Inc. (NYSE:YUMC)
Forward PE ratio as of September 11: 13.18
Average Analyst Price Target Upside Potential: 41.98%
Number of Hedge Fund Holders: 24
Yum China Holdings, Inc. (NYSE:YUMC) is one of the undervalued cyclical stocks to buy, according to analysts, as the Chinese economy shows signs of recovery heading into year-end. The company operates and franchises restaurants in China. It also operates V-Gold Mall, a mobile e-commerce platform to sell products, and offers online food delivery services.
Yum China Holdings, Inc. (NYSE:YUMC) delivered solid second-quarter financial results that show it is benefiting from a growing Chinese economy. Revenue in the quarter was up 1% year over year to $1 billion, hitting a new quarterly record. Its adjusted net income rose to $212 million from $197 million a year ago. The company continued its rapid expansion, adding 401 new locations in the quarter, bringing the total to 15,423.
The robust Q2 2024 results demonstrate robust growth and strategic efficiency. It also revealed intentions to open between 500 and 600 K-Coffee Cafes and transform one hundred Pizza Hut outlets into the WOW model as part of its expansion plan. Yum China Holdings, Inc. (NYSE:YUMC) also stated its desire to allocate $1.5 billion back to its investors in the near future while keeping a 3-year growth objective of returning a minimum of $3 billion through sustainable expansion.
Yum China Holdings, Inc. (NYSE:YUMC)’s price-to-earnings ratio stands at 13, which indicates a fair valuation compared to its earnings.
According to Insider Monkey’s database, 24 hedge funds held stakes in the company by the end of Q2 2024. Yum China Holdings, Inc. (NYSE:YUMC) is rated as a buy based on consensus estimates of 9 Wall Street analysts with an average price target of $48.26, implying 41.98% upside potential.
In their Q4 2023 investor letter, Baron Funds explained why Yum China Holdings, Inc. (NYSE:YUMC) declined. Here’s what the firm mentioned:
“Yum China Holdings, Inc. (NYSE:YUMC) is the master franchisee for the YUM brands in China and operator of the KFC and Pizza Hut restaurant networks in that market. Shares detracted after the company reported a negative surprise on margins for the third quarter and hinted that increased competition and cost-consciousness among Chinese consumers could cause that margin compression to continue through the first quarter of 2024. Although in-year margins are volatile at Yum China, its pristine balance sheet, cumulative investments in technology, unmatched scale, and successful pivot to higher-ROI, smaller footprint stores in recent years should drive continued 8% to 10% store growth at attractive returns. Further, given its strong free-cash-flow generation and strong balance sheet, we believe the company is likely to offer capital returns to shareholders in excess of earnings over the next several years. We remain shareholders.”
4. LKQ Corporation (NASDAQ:LKQ)
Forward PE ratio as of September 11: 10.10
Average Analyst Price Target Upside Potential: 45.20%
Number of Hedge Fund Holders: 31
LKQ Corporation (NASDAQ:LKQ) is an auto parts Company that distributes replacement parts, components, and systems used in the repair and maintenance of vehicles. It distributes bumper covers, automotive body panels, lights, mechanical automotive parts, and accessories.
LKQ Corporation (NASDAQ:LKQ) holds a significant position in the vehicle replacement parts industry. This market is somewhat consistent due to its expansion opportunities being linked to the mileage of light vehicles.
Its worldwide presence positions it as the top contender in North America and Europe. The company intends to leverage its size, accumulated through approximately 300 acquisitions, to secure a larger market share by maintaining a greater inventory of car parts than its rivals.
LKQ Corporation (NASDAQ:LKQ) is one of the best undervalued cyclical stocks to buy, according to analysts, as it is in a phase of robust growth depicted by solid Q2 2024. The auto parts company has prioritized strategic pillars of profitable revenue growth, margin enhancement, and cash flow generation while enhancing operational excellence to maximize our performance.
Consequently, revenues in the second quarter increased by 7.6% to $3.4 billion as net income dropped to $185 million from $281 million as of last year’s same quarter. Cash flow from operations and free cash flow were $213 million and $133 million, respectively.
LKQ Corporation (NASDAQ:LKQ)’s revenue growth in the past year has grown by 12.25%. Additionally, the company has demonstrated a strong gross profit margin of 39.36%, showing that it’s boosting its sales and efficiently handling its production costs, resulting in improved profitability.
During the second quarter of 2024, the company returned over $200 million to its shareholders, $125 million to repurchase shares, and about $80 million in cash dividends, affirming its ability to remain valuable to shareholders.
According to Insider Monkey’s second-quarter database, 31 hedge funds were bullish on LKQ Corporation (NASDAQ:LKQ), compared to 23 funds in the preceding quarter. Israel Englander’s Millennium Management is the leading stakeholder of the company, with 1.24 million shares worth $51.41 million.
Wall Street analysts maintain an average buy rating on the stock with a $56.60 price target, implying a 45.20% upside potential from current levels.
Aristotle Small/Mid Cap Equity Strategy stated the following regarding LKQ Corporation (NASDAQ:LKQ) in its fourth quarter 2023 investor letter:
“LKQ Corporation (NASDAQ:LKQ), a North American market leader in alternative collision repair parts with expertise stemming across used, recycled, refurbished, and remanufactured collision repair parts as well as the market for (new) aftermarket collision repair, was added to the portfolio. Overall, we believe the company maintains favorable scale advantages that allow for volume purchase discounts from suppliers and a wider distribution network, higher fill rates, and faster response times relative to competition. Furthermore, the company has made investments in improving its technology and logistics network beyond that of its smaller competitors, which we believe will further cement its market position through technological sophistication.”
3. JD.com (NASDAQ:JD)
Forward PE ratio as of September 11: 6.56
Average Analyst Price Target Upside Potential: 46.61%
Number of Hedge Fund Holders: 59
JD.com (NASDAQ:JD) is an internet giant that operates as a supply chain-based technology. It offers computers, communication, consumer electronics products, home appliances, and general merchandise products.
While online retailing remains JD.com (NASDAQ:JD) ‘s biggest source of revenue and earnings, the company’s logistics arm is also experiencing tremendous growth amid a recovering global economy. The company is also benefiting from a Chinese economy that is showing signs of recovery, as depicted by higher consumer spending.
The company is also benefiting from resorting to low prices for products that keep customers returning for more. Its growing scale and operating leverage allow it to offer significant discounts, keeping customers happy on its platform.
As its e-commerce operations have seen increasing success and financial gains, JD.com (NASDAQ:JD) has ventured into new sectors such as logistics, healthcare, and financial technology. These diversifications introduce the tech behemoth to fresh prospects, particularly as the rivalry in the e-commerce sector grows due to the emergence of platforms like Pinduoduo and Douyin.
JD.com (NASDAQ:JD)’s second-quarter earnings for 2024 highlighted its robust growth trajectory, setting the stage for another year of exceptional earnings and cash flow. It delivered $40.1 billion in revenues driven by robust performance across its main business areas. Improvements in operations led to a notable jump in adjusted operating income, hitting $1.6 billion.
As a result, the profit margin grew to 5% from 3% the year before. This growth also led to a 29% increase in operating cash flow, reaching $6.98 billion, compared to $5.43 billion in the previous year. Furthermore, the company’s free cash flow rose by more than 45% to $6.82 billion.
With JD’s financials continuing to surge against a stagnant share price, the stock’s undervaluation gap has kept widening. The stock is trading at a price-to-earnings multiple of 6.5, affirming a crazy low undervaluation, given the robust underlying growth.
According to the Insider Monkey database, 59 hedge funds held stakes in JD.com (NASDAQ:JD) by the end of the second quarter. Based on 12 Wall Street analysts, JD is a buy with an average price target of $38.09, implying a 46.61% upside potential from current levels.
Ariel Investments’ Ariel Global Fund discussed JD.com, Inc. (NASDAQ:JD) in its Q1 2024 investor letter, stating:
“We initiated a position in China-based technology-driven E-commerce company, JD.com, Inc. (NASDAQ:JD). The brand has long been known across the region as a superior online shopping channel due to its unique first-party model and unparalleled fulfillment service underpinned by JD Logistics. Yet, a challenging macro environment drove shares lower as shoppers began seeking bargains. In response, the company made significant investments in elevating its third-party merchant platform to enhance its variety of product offerings and price competitiveness for consumers. We believe these actions will yield an improved product mix, stronger top-line growth and margin expansion on a go-forward basis.”
2. MGM Resorts International (NYSE:MGM)
Forward PE ratio as of September 11: 11.59
Average Analyst Price Target Upside Potential: 59.33%
Number of Hedge Fund Holders: 44
MGM Resorts International (NYSE:MGM) is one of the top consumers cyclical stocks for gaining exposure into the resorts and casino space poised to receive a boost on interest rate cuts. The company operates casinos, hotels, and entertainment resorts in the United States and internationally. Its casino operations include slots and table games, as well as online sports betting and iGaming through BetMGM, which should receive a boost on consumer purchasing power edging higher on lower interest rates.
The outlook is improving for MGM Resorts International (NYSE:MGM) following prolonged periods of pandemic restrictions; its profit-generating casinos in the Chinese special administrative region of Macao are now experiencing a resurgence. For instance, MGM China’s revenues were up 78% in the first quarter, over $1.1 billion.
In the second quarter, MGM Resorts International (NYSE:MGM) China’s revenues increased by 37% compared to last year’s period, reaching $1.02 billion. This increase was mainly due to the acceleration of activities after lifting travel and entry limits related to COVID-19 in the first quarter of 2023. Casino income at MGM China rose by 33% year-on-year, reaching $891 million.
MGM China’s net earnings from its properties, after adjusting for interest, taxes, depreciation, amortization, and costs related to restructuring or rent, stood at $294 million, a significant rise from the $209 million recorded in the previous quarter.
MGM Resorts International (NYSE:MGM) saw a 3.6% rise in its total revenues in Q2, hitting $4.33 billion in the second quarter. The firm saw a major expansion in its activities in Las Vegas and Macau and significant advancements in its digital and global growth plans.
MGM Resorts seems on course to sustain its rebound, affirming why it is one of the best undervalued cyclical stocks to buy, according to analysts. It is generating greater profits than its primary rivals. Additionally, an upturn in Macao and the eventual launch of its casino in Japan are expected to benefit the stock in the long run.
MGM is currently trading at a discount to the industry, with a forward 12-month price-to-earnings (P/E) ratio of 11.61, well below the industry average of 27.84x. Of the 912 hedge funds tracked by Insider Monkey, 44 hedge funds reported owning stakes in MGM Resorts International (NYSE:MGM) in the second quarter of 2024. Wall Street analysts maintain a buy rating on the stock with an average price target of $55.56, implying a 59.33% upside potential.
1. PDD Holdings Inc. (NASDAQ:PDD)
Forward PE ratio as of September 11: 6.56
Average Analyst Price Target Upside Potential: 79%
Number of Hedge Fund Holders: 86
According to analysts, PDD Holdings Inc. (NASDAQ:PDD) is one of the top undervalued cyclical stocks to buy to diversify an investment portfolio into the internet retail space. Domiciled in Dublin, Ireland, it operates as a multinational commerce group offering consumer products in various categories, including agricultural produce, apparel, food and beverage, electronic appliances, furniture, and household goods.
The company’s competitive edge stems from carrying most of its business in China and, therefore, exposure to a massive marketplace. Its discount marketplace has carved a niche targeting shoppers in lower-tier cities.
PDD Holdings Inc. (NASDAQ:PDD) also took advantage of its early surge in growth to introduce an online platform focused on agriculture, bridging the gap between farmers and consumers directly. This direct-to-consumer model allows PDD to offer fresh produce at significantly reduced prices compared to conventional supermarkets. Additionally, this move has established PDD as a key player in the agricultural sector, a notable position that Alibaba and J.D. were missing.
Between 2018 and 2023, PDD experienced an impressive compound annual growth rate (CAGR) of 80%. In contrast, Alibaba’s growth rate was a more modest 20% from fiscal 2019 to fiscal. The company is projected to register market share growth between 2023 and 2026 in China, and it should see its revenue grow at a compound annual growth rate of 38%. Likewise, its net income is expected to grow at a CAGR of 47%, which should allow it to generate more shareholder value.
In its second quarter of 2024, PDD Holdings Inc. (NASDAQ:PDD) delivered an 86% year-over-year revenue increase to RMB 97 billion as it successfully shrugged off stiff competition and global uncertainties. Adjusted operating net income was up 139% to $4.48 billion, leading to adjusted earnings per share of $3.20, up from $1.45
The stock is trading at 6 times its forward earnings, a dirt cheap multiple for investors eyeing exposure in the Chinese e-commerce landscape.
According to Insider Monkey’s second quarter 2024 database, 86 hedge funds included PDD Holdings Inc. (NASDAQ:PDD) in their portfolios.
On the other hand, analysts on Wall Street rate the stock as a Buy with an average price target of $166.58, implying a 79% upside potential from current levels.
Here is what Baron Funds, an investment management company, said about PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
The best undervalued cyclical stocks to buy, according to analysts, are companies poised to benefit and generate significant value as economic conditions improve on lower interest rates. However, given that the artificial intelligence arms race is just but starting, there are under-the-radar AI stocks trading at highly discounted valuations that hold greater promise for anyone looking to diversify their portfolio. If you are looking for an AI stock that is more promising than the top activist investment plays, check out our report about the cheapest AI stock.
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