We recently compiled a list of the 10 Worst Affordable Stocks Under $10. In this article, we are going to take a look at where ADT Inc. (NYSE:ADT) stands against the other worst affordable stocks to buy under $10.
Can the Interest Rates Rise in the Long Run, Despite the Fed Cut?
Wall Street and the market are celebrating the Fed rate cut from last week. However, the shadows of uncertainty are still hovering over, especially with the upcoming elections. Fundstrat Global Advisors’ Co-Founder Tom Lee and Professor Jeremy Siegel are optimistic about the market going into a period of growth at least until the elections.
We recently discussed this point of view about how the market is expected to grow with the interest rates coming down. You can take a look at 10 Worst Performing Affordable Stocks Under $40, to read more about it. Here’s an excerpt from the article:
“Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business and Wisdom Tree chief economist, recently appeared on CNBC and expressed that he was pleasantly surprised by the Federal Reserve’s decision to make a 50 basis point cut. While talking about how the market is going to perform after the announcement, Professor Siegel said the market is going to be at an all-time high and there are not going to be any fluctuations as we have seen in the past few days.
The word “recalibration” holds significance here, the market has been 100% towards the target unemployment around 80% to 90% towards the inflation target and the Fed hasn’t moved the interest rate. Professor Siegel pointed out that the gap has been growing between the Fed Funds and the market conditions and they were thinking about a single cut by year-end until June. However, the latest announcement mentioned the Fed will cut rates at each meeting making a total of 6 cuts until June of next year. This will bring the Fed Funds rate down 200 basis points to 3.3%, which is where the professor thinks it should be.”
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.
It is important to note that Janjigian’s strategy is somewhat hedged, meaning he has stakes in both large and small-cap stocks, indicating that any market outcome will eventually benefit his portfolio.
Adding to this Patel is thinking along the same lines as well. She also believes that the upcoming quarter could be slower, mainly due to the delay by the Fed in lowering the rates. Patel expects the economy will continue to grow but at a slower rate of merely 1% to 1.5%. Talking about her popular stock picks, she prefers companies with sustainability and earnings levels above the market average.
Our Methodology
We used the Finviz stock screener to get a list of stocks under $10 that are trading at a discount to the market average (forward P/E is 23 according to data from WSJ) with earnings expected to grow this year. Using this criteria, we shortlisted 20 stocks and then selected 10 stocks that were most widely held by hedge funds. We ranked the stocks in descending order of the number of hedge funds that have stakes in them, as of Q2 2024. Please note that all data was recorded on September 22, 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).
A technician demonstrating a security solution for a corporate office.
ADT Inc. (NYSE:ADT)
Share Price: $7.25
Forward P/E Ratio: 10.86
Earnings Growth This Year: 33.30%
Number of Hedge Fund Holders: 23
ADT Inc. (NYSE:ADT) is a smart home and home security company operating in the United States. The company provides security systems inducing burglar alarms, life safety alarms, smart security cameras, and video surveillance systems. Moreover, it also provides home automation systems that allow customers to control lighting and security, remotely through mobile phones or online apps.
ADT Inc. (NYSE:ADT) has established itself as a trusted leader in the home security industry throughout the United States. The company has a vast customer base spanning over 6.4 million subscribers. Many differentiating factors help fuel the growth of the company, one of the major differentiating factors is the average retention time of customers. Users of ADT Inc.’s (NYSE:ADT) technology have an average retention time of more than 8 years, meaning the company generates a significant amount solely through its recurring revenue. It generates around $4.3 billion in annualized recurring monthly revenue.
In addition to this, the investment and growth case for the company is even more impressive. According to the US Census Bureau, around 59 million people had home security systems installed in their homes, this number is expected to grow at a CAGR of 8% to reach 85 million people by 2027. As ADT Inc. (NYSE:ADT) is one of the leading providers of security technologies, this growth in users will directly translate into the company gaining more customers.
Talking about the second quarter results of the company, its revenue grew 3% year-over-year to reach $1.2 billion, with adjusted free cash flow improving 14% during the same time. The stock was held by 23 institutional investors in Q2 2024, with total positions worth $407 million.
Ariel Fund stated the following regarding ADT Inc. (NYSE:ADT) in its Q2 2024 investor letter:
“Leading provider of automated security solutions ADT Inc. (NYSE:ADT) also traded up in the quarter. A top- and bottom-line earnings beat, highlighted by strong growth within the consumer and small business segment, low attrition, an improving payback period and margin expansion aided shares. Meanwhile, ADT sold its commercial business and is winding down its solar business to focus on profitability in the residential sector and pay down debt. We continue to believe ADT’s industry-leading brand and national presence, coupled with its Google and State Farm strategic partnerships, position it to be a prime beneficiary of growing demand for smart home technologies, including fully monitored residential security.”
Overall ADT ranks 7th on our list of the worst affordable stocks under $10. While we acknowledge the potential of ADT as an investment, 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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Disclosure: None. This article is originally published at Insider Monkey.
