We recently compiled a list of 7 Cheap Rising Stocks to Invest In. In this article we will look at where Alibaba Group Holding Limited (NYSE:BABA) ranks among the cheap rising stocks.

The recent Fed rate cuts have been a major catalyst for the market, and have provided an additional boost to an already strong performance. The market started the day with another all-time high on September 26 and it seems like the cuts have been positively influencing market sentiment and activity.

Nevertheless, some experts are still saying that investors are moving with caution as the timeline moves closer to the US elections. Wisdomtree CEO, Jonathan Steinberg recently joined CNBC “Money Movers” as he discussed the impact of the Fed’s actions on market flows and noted that while the 50-basis-point rate cut may reduce recession risks, a significant amount of money remains on the sidelines.

Steinberg explained that many investors are cautious, keeping money in safe places like money market funds, due to uncertainty about the upcoming election and its potential impact on the economy. The differing policies of the candidates make it hard to predict market trends, so people are waiting to see the election results before making big investment decisions.

Expert Opinions on the Election

As the elections move closer, the sentiment has been quite mixed around the candidates as it seems like a very close one. While many have a solid opinion on their favorite candidates, economists and market experts might not be feeling the same.

In our article 7 Best Revenue Growth Stocks to Buy According to Analysts, we discussed Professor Jeremy Siegel’s opinions on the Fed cuts and upcoming elections. Here is an excerpt from the article:

“In a discussion about economic policies from the presidential candidates, Professor Siegel critiqued both sides as extreme and said that their policies are unlikely to be implemented. He said that there would be a divided government that would limit any drastic changes. He stressed that while some policies might be proposed, actual governance would lead to compromises rather than sweeping reforms.”

While Professor Siegel remained neutral and criticized both sides, Harvard professor and former Chairman of the Council of Economic Advisers, Jason Furman seems to be leaning more toward the Democratic Party. However, he too criticized the economic plans of both candidates on September 20 in an interview on CNBC’s Squawk Box.

Insights from Jason Furman on Fed Policy

In the discussion about the Fed’s rate cut policy, Furman noted that while he would have preferred a smaller 25-point cut, he does not believe the Fed has inside knowledge of serious economic risks.

He thinks the move only shows caution over rising unemployment. About the unemployment situation, he said that he is, “a little bit nervous about it too, just not quite as nervous as 50 basis points.”

Furman acknowledged that inflation has come down but pointed out that risks such as potential wage-driven inflation and the possibility of a recession are still there. He appreciated the Fed’s gradual approach, which allows for adjustments in future rate decisions if needed.

Our Methodology

For this article, we used stock screeners to identify over 30 stocks with more than 10% share price gain over the last month and a forward price-to-earnings ratio of less than 15 as of September 27. We narrowed our list to 7 stocks most widely held by institutional investors. The 7 cheap rising stocks are listed in ascending order of their hedge fund sentiment which was taken from Insider Monkey’s database of over 900 elite hedge funds.

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).

Alibaba Group Holding Limited (NYSE:BABA)

FWD PE Ratio: 12.02

1-Month Stock Price Performance: 32.47%

Number of Hedge Fund Holders: 91

Alibaba Group Holding Limited (NYSE:BABA) is a major Chinese multinational company that excels in various sectors, including e-commerce, retail, internet services, and technology. Its extensive portfolio features popular platforms such as Taobao and Tmall, which are central to its e-commerce operations, alongside Alimama, the company’s in-house monetization service.

It also facilitates online wholesale through sites like 1688.com and Alibaba.com, as well as AliExpress, its international retail marketplace. Additional offerings include Lazada, Trendyol, and Daraz, which expands its reach across Southeast Asia, and Freshippo, a grocery retail platform.

With Tmall Global catering to import needs, the company generates revenue primarily through fees and commissions from merchants using these platforms, it has taken over an impressive 40% share of China’s total e-commerce gross merchandise value (GMV) and has a vast active user base of 930 million as of 2023.

A significant area of growth for the company has been in AI. It has been actively integrating AI into its services, utilizing features like automated replies and chatbots to assist merchants in delivering better customer service.

The AI tools are invaluable, offering 24/7 availability to address common inquiries, which is particularly useful during off-hours. As consumer shopping behavior shifts towards more personalized experiences, Alibaba’s (NYSE:BABA) AI capabilities enable more accurate product recommendations, which can lead to improved sales conversions and enhanced customer engagement.

Its ambition in the AI space extends beyond basic customer service applications. Recently, the company has made strides in developing its own large language models (LLMs), in which it has experienced a remarkable increase in AI-related revenue, which has increased by triple digits.

Recognizing the demand for AI innovation, the company has released over 100 new open-source AI models that cater to diverse applications, including language processing, audio, visual comprehension, and coding. One of the advancements is a new text-to-video model that allows users to convert images into videos simply by typing prompts, which creates new creative possibilities for users.

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)

Overall BABA ranks 2nd on our list of the cheap rising stocks to invest in. While we acknowledge the potential of BABA 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 an AI stock that is more promising than BABA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure. None. This article was originally published on Insider Monkey.