We recently published a list of 12 Undervalued Cyclical Stocks to Buy Right Now. In this article, we are going to take a look at where BorgWarner Inc. (NYSE:BWA) stands against other undervalued cyclical stocks to buy right now.
Consumer Cyclicals: Sector Outlook 2025
On December 14, Brooke Roach, analyst at Goldman Sachs joined CNBC for an interview to discuss the firm’s outlook on consumer cyclicals for 2025. Roach mentioned that the firm is bullish on the outlook for consumer discretionary growth into 2025. She highlighted that the firm has a property consumer cash flow model, which considers various economist’s input regarding wages, healthcare, and essential expenditure cost. The model suggests that consumer spending will be strong in 2025, with discretionary cash flow growth of 5.2%. She explained that based on the research and findings the firm has a more optimistic view of consumer growth and thereby a bullish sentiment toward investment in apparel and accessories stocks in 2025.
READ ALSO: 12 Cheapest Stocks with Biggest Upside Potential and Top 10 Undervalued Tech Stocks to Buy According to Hedge Funds.
While talking about the themes that the firm has analyzed in 2024 and expects to continue this year, Roach mentioned that the consumer is very demanding and is seeking value. This means that they are looking for variety and innovation. Roach further elaborated that many of the top performers in the sector have been those companies that were able to provide the required innovation for the consumers. She also highlighted that heavy reliance on China as a sourcing partner has also been an issue for some of the companies. According to Roach, investors are looking for visibility into the sourcing plans, and companies that have successfully been able to present a plan for diversifying their sourcing have provided a more compelling investment case.
We have also covered consumer spending and its impact on the cyclical sector in the 8 Best Cyclical Stocks to Buy According to Hedge Funds. Here’s an excerpt from the article:
During strong economic periods, cyclical stocks tend to perform well because consumers have more disposable income to spend on luxury items, vacations, and home improvements. Conversely, during economic downturns or recessions, people often cut back on discretionary spending, leading to a decrease in demand for these goods and services.
As the Federal Reserve lowers interest rates, it is creating a favorable environment for investing in cyclical stocks. Lower interest rates reduce the cost of borrowing, which encourages both consumers and businesses to take out loans and increase their spending. This uptick in consumer spending is especially beneficial for companies that rely heavily on discretionary purchases.
On January 16, Reuters reported that the U.S. Commerce Department announced a rise in retail sales for December, driven by robust consumer demand for motor vehicles and a variety of other goods. The data highlights the economy’s resilience and supports the Federal Reserve’s cautious stance on further interest rate reductions this year. The upbeat retail figures, combined with recent labor market strength, prompted some economists to revise their economic growth forecasts for the fourth quarter closer to the strong pace seen in the July-September quarter.
Our Methodology
To compile the list of the 12 undervalued cyclical stocks to buy right now, we used the Finviz stock screener, Yahoo Finance, and Seeking Alpha. Using the screener we aggregated an initial list of cyclical stocks trading under the forward P/E of 15 with positive earnings growth expected this year. Next, we cross-checked the forward P/E for each stock from Seeking Alpha and earnings growth from Yahoo Finance. Lastly, we ranked the stocks in ascending order of the number of hedge fund holders sourced from the third quarter hedge fund database of Insider Monkey. Please note that the data was collected on January 29, 2025.
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).
Workers assembling a state-of-the-art engine in a modern auto factory.
BorgWarner Inc. (NYSE:BWA)
Forward P/E Ratio: 7.78
Earnings Growth: 6.47%
Number of Hedge Fund Holders: 27
BorgWarner Inc. (NYSE:BWA) is a prominent player in the automotive industry. The company provides key components for electric, hybrid, and combustion engine vehicles. It operates through four main business segments including Turbos & Thermal Technologies, Drivetrain & Morse Systems, PowerDrive Systems, and Battery & Charging Systems.
BorgWarner Inc. (NYSE:BWA) is making significant strides in the electric vehicle (EV) market, particularly in Asia. It has secured contracts for its High Voltage Coolant Heater (HVCH) technology with three major original equipment manufacturers (OEMs) in Asia.
In China, its HVCH will be used in a fully electric SUV, with production starting in the second quarter of 2025. In Korea, the technology will be incorporated into an electric pickup truck, expected to begin production in March 2025. Lastly, in Japan, BorgWarner Inc. (NYSE:BWA) has won its first HVCH contract for a small battery electric vehicle, with production set to start in 2028. This also marks a notable entry into the Japanese market.
These strategic wins are expected to boost long-term profitability for the company. Moreover, its cheap valuation makes it one of the 12 undervalued cyclical stocks to buy right now.
Diamond Hill Large Cap Strategy stated the following regarding BorgWarner Inc. (NYSE:BWA) in its first quarter 2024 investor letter:
“Other bottom Q1 contributors included BorgWarner Inc. (NYSE:BWA) and Laboratory Corporation of America (LabCorp). Global automotive supplier BorgWarner has faced near-term volatility in the ongoing shift to electric vehicles and hybrids, which has, in turn, impacted results and weighed on shares. Given our expectation this volatility will continue for the foreseeable future, we exited our position in the quarter to upgrade our capital into more compelling opportunities.”
Overall, BWA ranks 10th on our list of undervalued cyclical stocks to buy right now. While we acknowledge the potential of BWA to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BWA 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.
