We recently compiled a list of the 10 Best Undervalued Stocks to Buy According to Reddit. In this article, we are going to take a look at where British American Tobacco p.l.c. (NYSE:BTI) stands against the other undervalued stocks. If interested, read our recent piece on the 10 Most Undervalued Stocks to Buy for Under $20.
Retail investors often discuss their investments on platforms such as Reddit and have become a major market force in recent years. According to a report, inflows from retail investors in the stock market between 2014 and 2019 averaged around $200 million, with a peak of $730 million in 2015. The figure spiked to $1.2 billion in 2020, with daily flows reaching $1.48 billion in 2021. Over the next couple of years, the value of inflows hovered between $1-1.4 billion per day, driven by commission-free online trading platforms and stimulus payments from the government. The surge in investor inflows is also owed to the pandemic, during which low interest rates and bond purchases by the Federal Reserve pumped heavy money into the American financial system.
The year 2024 has already been a healthy year for the American stock market, driven by a strong performance by technology stocks. Tom Lee, the co-founder and head of research at Fundstrat Global Advisors, is bullish on the ongoing fiscal year and anticipates the market to triple in size by the end of the decade.
The two major factors driving Lee’s bullish projection were the global labor shortage and a surge in the population of millennials. He mentions how millennials are the largest generation shaping the economy and are set to inherit big as we approach the generational wealth transfer of at least $80 trillion. According to a report, by 2030, millennials will have five times more wealth compared to what they have today. Moreover, the past two incidents of global labor shortage led to major spikes in technology stocks, and Lee is expecting the same again this time. However, he also warns of risks that could undermine his positive outlook, including AI backfiring, global recession, and geopolitical instability.
This uncertainty about the stock market, coupled with stocks’ volatility, makes it difficult for investors to ascertain the true value of the stock they want to invest in. American billionaire hedge fund manager, Bill Ackman, in May this year, discussed the current state of value investors and acknowledged that predicting the durability of a stock is far harder than building a financial model in the world of investment. Responding to a question about the use of AI to analyze stock investments and financial markets, Ackman stated that AI platforms might help in decision-making over the short run, but there is no guarantee that they would continue working over the long run.
Value investors purchase stocks they believe have a high value but their share prices do not reflect the stock’s actual worth, aiming to benefit when the market corrects itself. If the correct stocks are picked, it can lead to hefty returns for the investors through share price performance. One way of picking out the right stocks is noticing what the hedge funds are doing. Insider Monkey regularly covers top hedge fund stocks across industries for each quarter, and you can keep up with the information by following our website and subscribing to our newsletter. One such example is the 10 Best Aerospace and Defense Stocks to Buy Now.
Methodology
We went through several threads on Reddit to identify the most talked about top undervalued stocks according to investors on the platform. After gathering a list of companies, we went through a stock screener to verify that these stocks were undervalued. Then we sorted and listed the stocks in ascending order of how frequently they were mentioned on Reddit for being undervalued. In cases where two or more stocks were level on the metric, we outranked one over the other based on hedge fund sentiment about the stocks in question. Insider Monkey’s database of 920 hedge funds for Q1 2024 was used for that purpose.
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 close-up of an array of tobacco products, emphasizing the selection and consumer choice.
British American Tobacco p.l.c. (NYSE:BTI)
Investors on Reddit that consider the stock undervalued: 4
The British American Tobacco p.l.c. (NYSE:BTI) has been manufacturing and selling cigarettes, nicotine, and other tobacco products across the globe since its establishment in 1902. Headquartered in London, it is among the largest tobacco companies in the world. In 2023, the company reported a 3.1% increase in its organic revenue. Profits from operations were also up 3.1%, while earnings registered a 4% growth driven by an increased focus on efficiencies and new category contribution. Around 3 million new consumers were added during the year, with 1.1 million of them in the fourth quarter alone. The company also highlighted that its new categories, Vuse and Velo, significantly contributed to the overall performance, with their revenues increasing 18% and 21%, respectively.
The financial results showed resilience amid the challenges faced by the company in the wake of evolving industry dynamics, especially within the United States where consumers shift to cheaper brands due to the increasing cost of living and the rise of illicit vape trade. The numbers also reflect the strength of British American Tobacco p.l.c. (NYSE:BTI)’s diverse and multi-category portfolio, with smokeless representing 30% of the company’s overall revenue in 24 markets.
Having said that, the bear case against the stock is that it still sells cigarettes as its main product, the demand for which has been on a consistent decline over the last few years. The company’s production of cigarettes has fallen from roughly 700 billion in 2018 to just 555 billion in 2023, representing a 21% decline. This has led to its share price dropping by over 50% during the period. British American Tobacco p.l.c. (NYSE:BTI) has so far managed to offset the volume reduction by increasing the price of cigarettes, but whether or not this approach works over the long run is dicey at this point. The cigarettes segment is critical to the company as it predominantly supports its huge dividend yield of 9.9%.
On the other hand, the strong show of its new categories has been impressive, as is evident from the financial results of 2023. These categories have become profitable two years ahead of schedule and now contribute significantly toward the company’s overall revenues and earnings. The new products include heated tobacco, vapes, and oral offerings, among others. The company has set a target to generate half of its sales by 2035 from non-combustible products. Considering the progress made by BTI with its new categories, there is good reason to believe that the company may be able to meet its goal, and if it does, the stock will likely be viewed positively by investors. Already, investor sentiment on Reddit suggests the stock is undervalued with upside potential. Industry analysts also have consensus on the stock’s Buy rating, with an average share price target of $38, which is 14.46% higher than its current level. Moreover, according to Insider Monkey, 19 hedge funds are bullish on the stock.
Overall BTI ranks 7th on our list of the best undervalued stocks to buy according to Reddit. You can visit 10 Best Undervalued Stocks to Buy According to Reddit to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of BTI 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 BTI 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.