We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where General Motors Company (NYSE:GM) stands against the other undervalued stocks.
With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.
Concentration of S&P 500
Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.
The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”
Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.
There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.
However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.
Are The US Stocks Overvalued or Undervalued?
The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.
The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.
Our methodology
We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why are we interested in 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).
A group of technicians in a garage, inspecting car parts and ensuring safety compliance.
General Motors Company (NYSE:GM)
Forward P/E as of August 22: 4.78x
Number of Hedge Fund Holders: 72
Expected EPS Growth this Year: 30.5%
General Motors Company (NYSE:GM) designs, builds, and sells cars, trucks, crossovers, and automobile parts. It offers vehicle protection, parts, accessories, maintenance, satellite radio, and automotive financing services.
General Motors Company (NYSE:GM) focuses on capitalizing on the shift to electric vehicles. At the same time, the company is also maintaining its strength in the core gas-engine truck and SUV business. The company is well-placed relative to secular tailwinds in the automobile business. With Sierra joining the EV lineup of the company, General Motors Company (NYSE:GM)–owned GMC brand plans to become a leader in all-electric truck sales in the US.
Therefore, its aggressive pivot towards electric vehicles and autonomous driving technologies places it at the forefront of the rapidly evolving market. Its Ultium battery platform, which is a modular system underpinning the entire future EV lineup, supplements its commitment to innovation. The company plans to expand its manufacturing capabilities in a way that this business can produce 1 million EV units in 2025.
For FY 2024, General Motors Company (NYSE:GM) is expected to post net income attributable to stockholders of between $10.0 billion – $11.4 billion and EBIT-adjusted of between $13.0 billion – $15.0 billion. Automotive operating cash flow is expected to come in the range of $19.2 billion – $22.2 billion.
Analysts at Mizuho increased their price target on shares of General Motors Company (NYSE:GM) from $48.00 to $52.00, giving it a “Buy” rating on 24th April. Diamond Hill Capital, an investment management company, released its first-quarter 2024 investor letter and mentioned General Motors Company (NYSE:GM). Here is what the fund said:
“Other top contributors included Allstate, Caterpillar and General Motors Company (NYSE:GM). Automobile manufacturer General Motors continues capitalizing on the shift to electric vehicles (EVs) while maintaining the strength of its core gas-engine truck and SUV business. Though it has experienced some setbacks — such as needing to roll back its Cruise driverless car project — we believe the company remains well-positioned relative to secular tailwinds within the automobile business.”
Overall GM ranks 6th on our list of the most undervalued stocks to buy. While we acknowledge the potential of GM as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than GM but 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.