We recently compiled a list of 10 Worst Performing Stocks to Buy on the Dip. In this article, we will look at where StoneCo Ltd. (NASDAQ:STNE) ranks among the worst performing stocks to buy on the dip.
Capital markets demonstrated increased volatility starting in August 2024 and continuing in September 2024. That being said, strong rallies followed numerous negative performance days. Therefore, these movements have helped keep the stocks moving in an overall positive direction. Market experts believe this is a great time to invest in equities. For those having money in cash, the current juncture provides an opportunity to put capital to work in the longer-term assets.
Wall Street experts believe that the markets are concerned about the signs of economic softness. The experts continue to assess how quickly the US Fed will respond to it through the adjustments in the interest rate policy. With the US Fed starting to cut the key policy rates, global money managers continue to figure out whether it is too late, or will the actions support the broader economy and continued corporate earnings growth. The economic environment has now been changed, with inflation falling and the job market appearing to be modestly weaker. The market experts believe that equity market leadership saw a drastic shift, with tech stocks seeing a modest, third-quarter retreat after leading the market’s surge since late 2022.
Q3 Market Rotation and Market Drivers Moving Forward
As per the US Bank, a subsidiary of the U.S. Bancorp, there was a major Q3 shift that took place in the S&P 500. The bank highlighted that the once-dominant technology sectors (IT and communication services), which outpaced other sectors in 2023 and in H1 2024, gave up some gains. As a result of an easing interest rate environment, the investors decided to shift their focus. The US Bank went on to highlight that the biggest Q3 beneficiaries were real estate and utility stocks.
Moving forward, inflation, labor market trends, business spending patterns, corporate earnings, and stock valuations are likely to dominate the broader US equity market. The US Bank mentioned that Q2 2024 earnings saw an increase of over 10% as compared to Q2 2023 earnings. Despite the challenges related to a slowing economy, the earnings expectations have not been changed. Notably, the markets continue to expect continued earnings growth through the remainder of 2024 and 2025. As per the earnings insight report by FactSet (dated September 20, 2024), for Q3 2024, the estimated (YoY) earnings growth rate for the S&P 500 stood at 4.6%. While analysts are expecting YoY earnings growth of 10.0% for CY 2024, they expect ~15.2% for CY 2025.
Amidst Volatility, Markets Will Experience Swift Recovery
The initial seven months of 2024 saw the broader market move forward, with only modest interruption or volatility. After a tough August start, the stocks recovered quickly, and the broader markets again ended the month in positive territory, only to start September on a volatile note. Most of the volatility stemmed from the expectations of a series of Fed rate cuts. This can be considered as the big driver for the broader market, mainly when the economic focus pivots to labor market conditions instead of inflation threats.
Amidst the broad-based volatility, market experts opine that large stocks were able to retain their advantage.
In July, there was an outperformance by the small stocks as the Russell 2000 Small-Cap Index gained over ~10%, compared to a ~1% gain for the large-cap S&P 500. This was mainly because of the prospects of Fed rate cuts, which led to the short-term shift into smaller stocks. However, the rotation to smaller-cap stocks was again sidetracked in August, with the S&P 500 again outperforming mid-cap and small-cap stocks. Over the past month, the Russell 2000 Index saw an increase of ~0.3%, while the S&P 500 Index went up by over ~2%. This demonstrates that, amidst volatility and macro-level changes, well-established stocks should be favored as they provide reasonably good entry points.
Our methodology
To list the 10 Worst Performing Stocks to Buy on the Dip, we used a Finviz screener and online rankings to filter out the stocks that have fallen significantly on a YTD basis. Finally, we ranked the stocks according to their potential upside, as of September 27. We have also included the number of hedge fund holders for each stock, as of Q2 2024, which we sourced from our 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).
StoneCo Ltd. (NASDAQ:STNE)
Average Upside Potential: 62.00%
% Fall on a YTD Basis: ~35%
Number of Hedge Fund Holdings: 35
StoneCo Ltd. (NASDAQ:STNE) offers financial technology and software solutions to merchants and integrated partners to conduct electronic commerce in Brazil.
On the YTD basis, the company’s stock saw a significant decline as a result of concerns regarding market saturation in the Brazilian payments industry. With the expected slowdown in Total Payment Volume (TPV) growth, it seems that the investors are concerned about the growth prospects of StoneCo Ltd. (NASDAQ:STNE). Also, expected price compression and a decline in operating leverage have impacted the company’s stock price in the recent past. StoneCo Ltd. (NASDAQ:STNE) has been facing challenges in the MSMB Card TPV amidst a competitive environment.
On the other hand, market experts believe that StoneCo Ltd. (NASDAQ:STNE)’s stock is poised for recovery as a result of an increase in its client base in the payments sector. In Q2 2024, the company saw substantial growth in the banking client base and client deposits. It continues to invest in sales to capture the SMB market. Moving forward, its business prospects are expected to be aided by the focus on cross-selling and improving software business initiatives, which should ultimately be reflected in the stock price.
While StoneCo Ltd. (NASDAQ:STNE) continues to see the potential for market consolidation and targets to maximize value from its assets, it remains optimistic about the credit portfolio’s performance and anticipates non-linear growth in disbursements. With the central bank’s roadmap for PIX NFC and the benefits of open banking, StoneCo Ltd. (NASDAQ:STNE) should continue its growth trajectory by broadening its credit offerings.
UBS Group upped its target price on shares of StoneCo Ltd. (NASDAQ:STNE) from $17.00 to $18.00, giving a “Buy” rating on 29th August.
Investment management company Ave Maria recently released its fourth quarter 2023 investor letter. Here is what the fund said:
“StoneCo Ltd. (NASDAQ:STNE) provides solutions that enable merchants and integrated partners to conduct electronic commerce seamlessly across in-store, online, and mobile channels in Brazil. StoneCo has faced near-term operational challenges because of the pandemic and high levels of inflation in Brazil. The company appears to be moving past these challenges and it appears that the successful integration of the newly acquired software business with its payments business will drive substantial shareholder value longer term.”
Overall STNE ranks 4th on our list of the worst performing stocks to buy on the dip. While we acknowledge the potential of STNE 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 STNE 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.
