We recently compiled a list of the 10 Most Undervalued Quality Stocks To Buy According To Analysts. In this article, we will look at where Mattel Inc. (MAT) ranks among the most undervalued quality stocks to buy according to analysts.
Are More Rate Cuts Necessary to Maintain The Current Economic Trajectory?
Despite global uncertainties, the US economy is viewed as stronger than its international counterparts. But then again, market challenges are undeniably persisting, and strategists are inclining toward one opinion or the other to help investors build a stronger portfolio for the rest of the year.
In such volatility, quality stocks with reliable earnings offer potential opportunities for risk-averse investors. Interest rates are currently high, but there is potential for significant gains if they decline. As current economic indicators support a favorable environment for growth and income generation, we covered a conversation from CNBC in our 10 Best Quality Stocks to Buy According to Analysts article, where the Global Investment Strategist at ProShares Advisors, Simeon Hyman, emphasized ‘income’ as a key focus, highlighting that fixed-income markets could provide 10-15% returns if geopolitical tensions worsen. Here’s an excerpt from that article:
“…the yield on the 10-year bond is nearly 4%, and there is potential for it to drop to 3% or lower if significant negative events occur. This scenario presents an opportunity for investors to realize gains of 10% or 15% on bonds in a tumultuous environment, a situation not seen in over a decade.
Despite the current market being down by 3.7%, which is slightly less than 4%, Hyman insisted that rounding was at play… there has been a 50-basis point cut and indications of a soft landing for the economy. A month-over-month increase of just 0.1% suggests that if one can overlook geopolitical issues, the US economy is faring better than many others globally and remains on solid economic footing.”
Richard Fisher, Jefferies’ senior advisor, joined ‘Closing Bell’ on CNBC on October 1 to discuss the Fed’s recent rate cut and what it means for the market from here. The former Dallas Fed Chair Richard Fisher shared his insights on the current state of monetary policy and the Fed’s approach to interest rate cuts, noting that he was not surprised by Chair Powell’s signals indicating smaller rate cuts are forthcoming. Fisher explained that he had been bullish since the end of 2023, despite initially predicting a recession that did not materialize. He emphasized the importance of measured cuts, stating that the Fed is looking at monetary policy with a long-term perspective, roughly 18 months out.
He highlighted the significance of recent economic data, particularly from the Atlanta Fed, which indicates strong growth above 3%. Fisher characterized the current economic environment as experiencing neither a soft landing nor a hard landing, but rather a smooth glide path. He believes that two more quarter-point cuts would be appropriate to maintain this trajectory. When discussing concerns about whether current rates are too restrictive relative to inflation, Fisher disagreed with the argument and pointed out that financial conditions remain accommodative, citing narrow spreads and strong private lending activity. He argued that with another two cuts, the Fed would not be overly restrictive.
Despite acknowledging Powell’s effective leadership, Fisher maintained that it was premature to declare victory regarding economic stabilization. He believes Powell’s term will continue until April 2026, and only then can a true assessment of success be made. Overall, Fisher’s emphasis on measured rate cuts and ongoing economic strength underscores the delicate balance policymakers must maintain in fostering growth while managing inflationary pressures.
This could have a positive impact on the stock market, especially for undervalued quality stocks. When interest rates fall, investors often shift their focus to equities as they seek higher returns. This could lead to increased demand for undervalued quality stocks, potentially driving up their prices. In that context and given Fisher’s cautious optimism, we’re here with a list of the 10 most undervalued quality stocks to buy according to analysts.
Methodology
To compile our list, we first sifted through Vanguard U.S. Quality Factor ETF holdings to find the ones with an upside potential of over 15% as of October 7, 2024. We then selected stocks with a forward P/E ratio under 15 and made a list of 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
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).
Mattel Inc. (NASDAQ:MAT)
Average Upside Potential: 19.42%
Forward Price-to-Earnings Ratio: 12.42
Number of Hedge Fund Holders: 31
Mattel Inc. (NASDAQ:MAT) is a multinational toy manufacturing and entertainment company known for its iconic brands such as Barbie, Hot Wheels, Fisher-Price, and American Girl. It designs, manufactures, and distributes a variety of toys and games for children of all ages. Its focus on innovation and storytelling has helped it maintain its position as a leading toy company.
In the second quarter of 2024, the company’s revenue declined by 0.69% year-over-year. Gross billings declined 2%, with growth in APAC offsetting declines in other regions. At the same time, the company gained market share globally, with strong performance in dolls, vehicles, and infant toys. Free cash flow increased to $826 million, and it repurchased $200 million of shares.
Segment-wise, however, doll sales declined, while vehicle sales increased. Fisher-Price grew double-digits, and the company gained market share in games. Mattel Creations, the D2C channel, continued to grow. It’s expanding its entertainment offerings with films, television shows, and digital gaming. The company expects the toy industry to decline modestly in 2024.
The company is focusing on growing its IP-driven toy business and expanding its entertainment offerings. It aims to increase profitability, gross margin, and cash generation. It expects long-term growth driven by innovation, market share gains, entertainment success, operational efficiencies, and a strong balance sheet. All of these factors make Mattel Inc. (NASDAQ:MAT) a top investment opportunity.
Longleaf Partners Fund stated the following regarding Mattel, Inc. (NASDAQ:MAT) in its Q2 2024 investor letter:
“Mattel, Inc. (NASDAQ:MAT)– Global toy and media company Mattel detracted for the quarter. The company reported what we viewed as solid quarterly results and an affirmation of 2024 guidance. We were particularly encouraged by their decision to increase their share repurchase program, which positions them well for FCF per share growth. As the quarter went on, however, the market focused on weaker consumer purchasing trends impacting Mattel and its peers. The market also seems to have moved past the success of last year’s Barbie movie, but we believe there is significant upside from media and entertainment revenue streams that are not yet reflected in today’s earnings expectations.”
Overall MAT ranks 5th on our list of the most undervalued quality stocks to buy according to analysts. While we acknowledge the potential of MAT as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MAT 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 on Insider Monkey.
