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 Coty Inc. (NYSE:COTY) 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 close-up of a woman’s face wearing a beauty product, highlighting the company’s range of luxury items.
Coty Inc. (NYSE:COTY)
Share Price: $9.19
Forward P/E Ratio: 16.48
Earnings Growth This Year: 51.40%
Number of Hedge Fund Holders: 23
Coty Inc. (NYSE:COTY) is a beauty company that specializes in developing and selling a range of beauty products including fragrances, cosmetics, and skincare. Its brand portfolio is categorized into three main areas namely Consumer beauty and Prestige. While Consumer beauty includes mass-market products like makeup and fragrances, the Prestige segment deals with high-end products. The company has a market presence in more than 121 countries and its products are readily available through various retail channels including physical stores and online platforms.
Management of Coty Inc. (NYSE:COTY) under the leadership of CEO, Sue Nabi has transformed its strategy from being a beauty leader to becoming a beauty trendsetter. The company has done that through various partnerships with models and by maintaining a high Advertising & Consumer Promotion (A&CP) of 20%. This strategy has turned out to be good for the company as it was able to once again deliver double-digit growth for its like-for-like (same-store) sales. The like-for-like revenue for fiscal 24 was up 11% and management believes to have outperformed the market which grew at 9%.
This strong revenue growth for the same stores has proved to be a differentiating factor for Coty Inc. (NYSE:COTY). The growth has led to improved margins that align with management’s expectations. For fiscal 24, the company grew its adjusted margins by 50 basis points to 64.4%, including the adjusted gross margin expanding by 140 basis points during the fourth quarter alone.
Advertising and marketing are key when it comes to consumer businesses, especially beauty, management expects their 20% A&CP to start paying off shortly. Moreover, looking ahead at F25, the company expects EPS between $0.540 and $0.570 aligning well with what analysts expect from the company.
While Coty Inc. (NYSE:COTY) is one of the worst affordable stocks under $10, it does not overshadow its potential to grow in the future. Hedge funds are bullish on the stock. It was held by 25 institutional investors in the second quarter of 2024, with total stakes worth more than $218 million. Point72 Asset Management is the top shareholder of the company with a position worth more than $55.9 million.
ClearBridge Mid Cap Strategy stated the following regarding Coty Inc. (NYSE:COTY) in its fourth quarter 2023 investor letter:
“Our holdings in the consumer staples sector also helped drive performance. Restaurant foodstuff distributor Performance Food Group continues to benefit from greater consumer spending on dining. Likewise, Coty Inc. (NYSE:COTY), the global beauty company comprised of a market-leading prestige fragrance business and mass cosmetic business, reported strong quarterly earnings with outperformance across all geographic regions and operating segments. With the continued strength of the prestige fragrance market globally, we believe the company’s fundamentals have improved much more than the stock’s valuation.”
Overall COTY ranks 8th on our list of the worst affordable stocks under $10. While we acknowledge the potential of COTY 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.
