In this article, we will look at the 7 Cheap Beginner Stocks to Invest In.
Does Fed Rate Cut Translate to a Higher Consumer Borrowing Trend?
The Federal Reserve has approved the interest rate cut of 50 basis points, which at least for the time being is turning out to be good for the stock market. The interest rate cut also means that businesses and consumers have received immediate relief, but is the public ready yet to jump out of their high inflation rate mindset?
According to a recent report by Reuters, even before the Fed announced a rate cut the financial markets had already begun making credit cheaper for consumers and businesses. Mortgage rates were slightly down, corporate bond yields were also cut, and day-to-day personal and auto loans were also eased. For instance, the average rate a person had to pay for a 30-year fixed home mortgage is 6% after decreasing 2 percentage points from a year ago. Moreover, as per Redfin, a real estate firm, the average median price of houses sold in the middle of September was $3,000 less than the all-time high prices in April and represented a 3% decrease year-over-year. A recent survey shows that while inflation has come down significantly during recent times, the public mood is still distracted due to the past two years of high inflation.
In one of our recent articles, we talked about how the interest rate cut helps both growth and value stocks. However, the market trends show that the recent announcement is favoring growth stocks more than value stocks. Here’s an excerpt from the 10 Worst Affordable Stocks Under $10:
“It is true that interest rate cuts help both growth and value stocks, but which ones are doing better? The current market trend shows the interest rate cut expectation and the announcement supported growth stocks more than the value stocks and also resulted in small caps becoming new favorites.
Talking about value stocks and how the market could be entering into a slower growth period, Vahan Janjigian, Chief Investment Officer at Greenwich Wealth Management, and Margaret Patel, Senior Portfolio Manager for multi-asset solutions at Allspring Global Investments discussed this in a recent CNBC interview. Janjigian expressed his cautiousness regarding the market even after the Fed cut rates. He believes that interest rates will go up in the long term. It is because the market is eventually going to get a more normalized yield curve, which he believes is good for the economy. If the yield curve continues to follow the upward trajectory, it will favor value stocks more than growth stocks.
Stated that the market moves in the direction Janjigian expects, we can see a sell-off for the stocks that are currently moving higher, including the tech and growth stocks. Moreover, he also pointed towards some of the biggest investment risks. He mentioned that the rising deficit, debt, and cost of servicing the debt are some of the biggest threats. Debt is also one of the reasons interest rates could potentially go up in the future, as the debt grows it can potentially push the market-determined interest rate higher.”
Banks are considered value stocks, Gerard Cassidy, RBC Capital Markets managing director, thinks banks’ margins will open up as the Fed begins rate cuts.
On September 20, Cassidy appeared in a CNBC interview to talk about how banks are likely to perform in the current scenario. Gerard Cassidy has done some research on the 25-year banking history of the United States and has concluded that when the Fed cuts rates in a period of no recession, bank stocks tend to go up. He mentioned that in 1995 when the Federal Reserve cut the interest rates and the economy was not going into a recession, bank stocks went up 55%.
Cassidy believes deposits of the banks set them apart from any other company. When the Fed starts to cut rates, the funding cost of the banks comes down due to their deposits. Moreover, most banks have loans and bonds from 2021 and 2022 at extremely low yields, so these assets mature in a higher rate environment even as rates come down. Regardless of this, the funding rates come down faster resulting in higher margins for the banks.
The concept explained above hasn’t changed since the comparison period of 1995, thereby indicating that bank stocks could potentially benefit from rate cuts. Gerard Cassidy thinks the current market condition should result in higher net interest margins and net interest income for at least the top 20 banks.
Lastly, while talking about consumer borrowing behavior, Cassidy believes, we need a greater amount of cuts and the magnitude of easing has to come in. He thinks perhaps at least a 100 basis point will trigger some borrowing trend among the general public.
With that, let’s talk about the 7 cheap beginner stocks to invest in.
A financial analyst looking at a monitor displaying the stocks of the public company.
Our Methodology
To compile the list of 7 cheap beginner stocks to invest in, we selected the stocks of established companies that were the most widely held by hedge funds and are trading below a forward P/E of 15. The list has been ranked in ascending order of the number of institutional holders, as of Q2 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).
7 Cheap Beginner Stocks to Invest in
7. Citigroup Inc. (NYSE:C)
Forward P/E Ratio: 10.66
Earnings Growth This Year: 3.30%
Number of Hedge Fund Holders: 85
Citigroup Inc. (NYSE:C) is a major international financial services company, which has operations in more than 500 countries and handles more than $5 trillion payments a day. The bank operates through two main business segments namely the Consumer Segment and the International Client group.
The strategic moat of the company lies in its ability to do business internationally. The company has global licensing making it one of the preferred banking partners for major Fortune 500 companies.
Citigroup Inc.’s (NYSE:C) treasury and trade solutions business is designed to cater to the needs of large multinational corporations. Moreover, the bank is undergoing a major transformation in its risk management and data governance systems. Management has assured that it is in the process of modernizing its infrastructure, unifying its tech platforms, and adding more automation and control to its overall banking system.
With its transformation underway, the company is expected to yield more international customers and subsequently more profits. The second quarter of 2024 already reported a significant increase in banks’ financials. The revenue of the bank grew 4% year-over-year to reach $20.1 billion and the net income grew 10% during the same time to reach $3.2 billion.
Citigroup Inc. (NYSE:C) is also trading at a discount to its sector and emerges as one of the cheap beginner stocks to invest in. It is trading at 10.6 times its forward earnings, a 12% discount to its sector. Moreover, its earnings are also expected to grow by 3.3% during the year to reach $5.7.
Diamond Hill Capital Long-Short Fund stated the following regarding Citigroup Inc. (NYSE:C) in its first quarter 2024 investor letter:
“Other top Q1 contributors included Meta Platforms, Citigroup Inc. (NYSE:C) and Walt Disney. Banking and financial services company Citigroup’s restructuring efforts are ongoing, and it continues remediating regulatory issues and building capital in anticipation of increased requirements. The company expects to see expenses fall meaningfully in the second half of 2024, bolstering the outlook from here.”
6. PDD Holdings Inc. (NASDAQ:PDD)
Forward P/E Ratio: 8.39
Earnings Growth This Year: 84.10%
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) is an international commerce group with a wide range of businesses. Two of its major business ventures include Pinduoduo and Temu. At first impression, the business model of the company looks very much like Alibaba or JD.com. However, the company might just turn out to be better than the two e-commerce giants.
The first point of attraction for investors is its cheap valuation. The stock is trading at only 8 times its forward earnings with earnings expected to grow by 84% during the year.
PDD Holdings Inc. (NASDAQ:PDD) was established only 9 years ago, but the company has progressed steadily to become China’s third-largest e-commerce platform in no time. It is giving competition to the already established tech giants and is leading the race at some corners. The company quickly capitalized on the market due to its strategy of targeting lower-income shoppers of the country in tier-two cities. It sold products at a cheaper rate than its counterparts and witnessed its growth skyrocket in no time.
After that the company launched one of its kind farm-to-table platforms that allowed farmers to directly sell fresh products to consumers, giving it a strategic moat against its competitors. Its Temu, a cross-border marketplace has also witnessed robust growth. The app has more than 167 million monthly active users and around 50 million users are from the United States.
It has done well financially as well despite a lack of interest from American investors due to the ongoing tension between the two countries. During the second quarter of 2024, its revenue grew 86% to CNY97 billion ($13.74 billion), with net margins improving 8% year-over-year.
Hayden Capital stated the following regarding PDD Holdings Inc. (NASDAQ:PDD) in its Q2 2024 investor letter:
“PDD Holdings Inc. (NASDAQ:PDD): A few weeks ago, Latepost (a leading Chinese technology news outlet) confirmed Pinduoduo’s online grocery initiative is solidly profitable (LINK). According to the article, Duoduo Grocery is able to achieve ~5% net profit margins in competitive markets (where they go up against Meituan Select). In non-competitive markets, they can achieve ~10 – 15% net margins.
The company doesn’t disclose the exact scale of Duoduo Grocery, but our calculations indicate it’s likely around ~RMB 300BN this year, and still growing in the double-digits. At that level, the division is likely contributing ~US $2.5BN in annual profits.
It’s an impressive result, but admittedly, not a huge needle-mover in light of the total $17.6BN net profits the company is expected to make this year (~14% of overall profits)…” (Click here to read the full text)
5. Dell Technologies Inc. (NYSE:DELL)
Forward P/E Ratio: 14.94
Earnings Growth This Year: 10.20%
Number of Hedge Fund Holders: 88
Dell Technologies Inc. (NYSE:DELL) is a leading technology company that designs and sells various computer technologies ranging from personal computers to integrated solutions such as technologies related to artificial intelligence (AI), data analytics, and cloud computing.
The company has two main divisions, Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG). The Infrastructure Solutions Group (ISG) helps businesses with their IT infrastructure needs including data storage, servers, and other networking technologies.
Dell Technologies Inc. (NYSE:DELL) is one of the cheap beginner stocks to invest in and is also considered to be an upcoming AI technology company. The company reported second-quarter results for 2024, indicating a 9% increase in revenue year-over-year, driven mainly by high demand for its servers which are used for mounting AI chips.
Its Infrastructure Solutions Group (ISG) revenue was up 38% during the same time to a record $11.6 billion. Within the segment, the server revenue increased by 80% from the same quarter last year, with AI servers accounting for $3.1 billion in revenue.
The increase in AI serves revenue indicates that the company is moving towards a point where a major source of revenue will come from its AI related operations. Another point that backs this up is the fact during the latest quarter its AI server backlog stood at $3.8 billion, indicating the company already has a strong pipeline for its servers.
The stock was held by 88 hedge funds in Q2 2024, with total stakes worth $2.9 billion. Coatue Management is the top shareholder of the company with a position worth more than $1 billion.
Carillon Scout Mid Cap Fund stated the following regarding Dell Technologies Inc. (NYSE:DELL) in its Q2 2024 investor letter:
“Dell Technologies Inc. (NYSE:DELL) was a top contributor despite reporting disappointing first-quarter earnings results, because investors looked through the near-term disappointment and expected strong growth from AI-related servers and personal computers. We expect Dell to participate in the growth of artificial intelligence hardware, especially as enterprises invest more aggressively. We like the company’s depth and breadth of products and services, as well as its focus on keeping costs low.”
4. Alibaba Group Holding Limited (NYSE:BABA)
Forward P/E Ratio: 9.95
Earnings Growth This Year: 3.70%
Number of Hedge Fund Holders: 91
One of the first names that comes to mind while talking about Chinese technology is Alibaba Group Holding Limited (NYSE:BABA). However, the company has been facing some difficulty maintaining its market-leading position. But it is still amongst the leaders when it comes to e-commerce, cloud technologies, and now AI as well.
The concept of artificial intelligence is not new for the tech giant. It has been using 24/7 chatbots long before artificial intelligence became a buzzword. However, management has made some recent developments within its cloud business which is driving improved revenues.
In the fiscal first quarter of 2025, Alibaba Group Holding Limited (NYSE:BABA) reported that its revenue grew 6% on the back of double-digit growth in its cloud business. Its AI-related product revenues were impressive with 155% growth during the same time.
The cloud segment growth was also due to an artificial integration that provides personalized suggestions for customers, resulting in targeted marketing of its products. It is also developing its large language model called Qwen 2.0, which will support more than 27 languages. Users have been liking Alibaba Group Holding Limited’s (NYSE:BABA) AI cloud platform indicated by a robust 200% growth during the quarter.
Management and analysts believed that artificial intelligence has the potential to bring the company to its former glory and it seems Alibaba Group Holding Limited (NYSE:BABA) has been doing well in keeping up the expectation.
O’keefe Stevens Advisory stated the following regarding 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)
3. Bank of America Corporation (NYSE:BAC)
Forward P/E Ratio: 12.29
Earnings Growth This Year: 6.20%
Number of Hedge Fund Holders: 92
Bank of America Corporation (NYSE:BAC) is a financial holding company based in the United States of America. It stands as the second-largest bank in the United States by assets. The financial holding company provides a range of services including deposits, savings accounts, cash management, and other banking-related services.
BAC is a popular stock among hedge funds. It was held by 92 hedge funds in Q2 2024, with total stakes worth more than 48.1 billion. Warren Buffet has long been a fan of banking stocks, especially Bank of America Corporation (NYSE:BAC). Buffett’s firm, Berkshire Hathaway is still the top shareholder of the company with a position worth $41.1 billion. However, there has been some movement about Buffett selling his stakes in the bank.
As per the most recent filing of Berkshire Hathaway, the company sold 5.8 million shares in Bank of America Corporation (NYSE:BAC) without any formal reason or comment. Investors of the bank have been watching this move closely and are confused if it is a sign of weakening business for the bank.
While the reason behind Buffett selling his stakes is still unknown, what’s evident is that the business of Bank of America Corporation (NYSE:BAC) is not at all weak. During the second quarter of 2024, the bank added around 278,000 new checking accounts. Moreover, the wealth management division announced 6,100 new relationships indicating that the number of small and medium business accounts is growing.
Talking about revenue, the growth was mainly flat with revenue growing only 1% from the comparable quarter last year, and the net income was down 3% to $13.7 billion during the quarter. However, on the bright side, the loan portfolio of the bank grew by 2% during the quarter $1.91 billion, indicating a growing balance sheet.
Lastly, the growing economy is also anticipated to be a positive point for the bank as it will trigger more credit card spending, loans, and business borrowing. Therefore, regardless of Warren Buffett selling a chunk of his shares in the company, the financials remain strong. Bank of America Corporation (NYSE:BAC) is one of the cheap beginner stocks to invest in with a forward P/E of 13% and earnings expected to grow by 6.2% during the year.
ClearBridge Value Equity Strategy stated the following regarding Bank of America Corporation (NYSE:BAC) in its first quarter 2024 investor letter:
“We added several new positions during the quarter. Our largest new addition was Bank of America Corporation (NYSE:BAC), one of the world’s leading financial institutions, serving some 66 million consumer and small business clients across the U.S. as well as large corporations, financial institutions and governments globally. We believe that the interest rate pressure that Bank of America faced in early 2023 has subsided, and risks surrounding deposit outflows have abated, which should allow the company to improve its book value and capital growth as well as benefit from a rebound of capital markets activity.”
2. Merck & Co., Inc. (NYSE:MRK)
Forward P/E Ratio: 14.37
Earnings Growth This Year: 433.80%
Number of Hedge Fund Holders: 96
Merck & Co., Inc. (NYSE:MRK) is a leading pharmaceutical company based in the United States that specializes in both Human health and Animal health. The company is and has been one of the favorite investments due to its high return rates. It has delivered more than 72% during the last 5 years, mainly due to its strong performance Keytruda immunotherapy drug, which is a standard care for various kinds of cancer.
Keytruda has proven to be a game changer for Merck & Co., Inc. (NYSE:MRK) with $26.3 billion in sales during the past year. The drug represents around 50% of the company’s pharmaceutical business. During the second quarter alone, its sales grew 16% year-over-year to reach $7.3 billion, while the overall sales of the company stood at $16.1 billion.
However, there is a slight twist to the story. Keytruda’s formulation patent for the company is set to expire in 2028, meaning Merck & Co., Inc. (NYSE:MRK) could lose its economic moat in a decade. Should you be concerned as an investor?
The concern can be valid as the cancer drug has been a significant winner for the company, however, management has been focused on advancing its pipeline and landing new approvals to diversify its portfolio.
It recently got its new medicine, a pneumococcal conjugate vaccine for adults approved by the FDA. Moreover, it launched another vaccine for patients with pulmonary arterial hypertension, which generated more than $70 million in sales from its approval in March to August, when the second quarter results were announced.
In addition, Merck & Co., Inc. (NYSE:MRK) has also been actively acquiring new businesses to expand its reach. Management, recently acquired EyeBio, helping the company progress with its retinal treatment medicines. Within the animal care segment, the company acquired Elanco’s aqua business.
The stock is also trading at a 34% discount to its sector, with earnings expected to grow by a staggering 433.80% during the year. Thereby justifying its inclusion among the best cheap beginner stocks to invest in.
Carillon Eagle Growth & Income Fund stated the following regarding Merck & Co., Inc. (NYSE:MRK) in its first quarter 2024 investor letter:
“After posting lackluster returns in 2023, Merck & Co., Inc. (NYSE:MRK) got off to a strong start in January by raising the long-term sales forecasts for its oncology and cardiology pipelines and reporting solid fourth-quarter results, coupled with strong financial guidance for 2024. Merck shares also finished the quarter strong after receiving U.S. Food and Drug Administration approval in late March for a new cardiology medicine with the potential to contribute significantly to sales growth over the next several years.”
1. JPMorgan Chase & Co. (NYSE:JPM)
Forward P/E Ratio: 11.99
Earnings Growth This Year: 22.00%
Number of Hedge Fund Holders: 111
JPMorgan Chase & Co. (NYSE:JPM) is one of the best stocks when it comes to large US banks. The market capitalization of $600.59 billion makes it the biggest bank in the United States. Moreover, it has a huge footprint demarcated by more than 5,100 branches throughout the country.
Relatively high interest rates for a long period can hamper the growth of any bank as it triggers stunted borrowing within the market. However, regardless of the interest rates staying high in the United States since the pandemic, the bank has done well to stay above analysts’ expectations. Its revenue for the second quarter of 2024 grew 22% year-over-year to reach $50.2 billion and the net income also improved 25% to more than $18.1 billion.
Analysts expect that if JPMorgan Chase & Co. (NYSE:JPM) has done well to outperform the top and bottom line expectations during the high interest rates, the recent Fed rate cuts will only boost its leading position in the country.
JPMorgan Chase & Co. (NYSE:JPM) has been transforming its internal banking operations by integrating generative AI into its day-to-day operations. Moreover, the company has also introduced a pay-by-face biometric solution for merchants throughout the country.
The bank also enjoys a strategic edge due to its diversified operations all of which are growing in terms of revenue and net income. Its commercial and investment bank (CIB) segment revenue rose 9% to $18 billion and delivered an 11% gain in net income. Asset and wealth management was also a success contributing around $5.3 billion to the revenue growth.
JPM was held by 111 hedge funds in Q2 2024 with total positions worth $6.98 billion. Fisher Asset Management is the top shareholder and his stakes in the bank are worth more than $2.5 billion.
Carillon Eagle Growth & Income Fund stated the following regarding JPMorgan Chase & Co. (NYSE:JPM) in its first quarter 2024 investor letter:
“JPMorgan Chase & Co. (NYSE:JPM) contributed positively to performance following solid financial results and positive guidance for the remainder of 2024. Moreover, growing chatter around rising capital markets activity likely contributed to the stock’s strong performance relative to other banks. Recall that JPMorgan has a robust capital markets franchise.”
While we acknowledge the potential of JPMorgan Chase & Co. (NYSE:JPM) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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