We recently compiled a list of the 10 Undervalued Cyclical Stocks to Buy According to Analysts. In this article, we are going to take a look at where JD.com (NASDAQ:JD) stands against the other undervalued cyclical stocks.
Economic growth in the U.S. surpassed forecasts in the second quarter, driven by robust consumer demand and increased government expenditure. The real gross domestic product, a measure of all goods and services produced, grew at an annualized rate of 2.8%, beating consensus estimates of 1.4%. It also significantly improved from the 1.6% GDP growth recorded in the first quarter.
Nevertheless, the economy has slowed in the year’s second half due to disappointing economic data. Private sector payrolls grew at the weakest pace in more than 3½ years in August, providing yet another sign of a deteriorating labor market, according to ADP. The weakness is a concern, especially for cyclical companies that experience the largest fluctuations in sales and profits as the economy strengthens or weakens.
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Since August was the weakest month for job growth since 2011, there are growing concerns that the U.S. economy is cooling off. Early indication is that hiring has slowed from the blistering pace following the COVID pandemic. Such weakness could spell more doom to cyclical companies in the materials, restaurant, and consumer food segments as prospects depend on consumers’ purchasing power.
Jamie Dimon, the Chief Executive Officer JPMorgan, is not ruling out stagflation even as the Fed cuts interest rates to try and support the economy. Dimon is concerned that a wave of inflationary pressures is approaching, including greater deficits and more spending on infrastructure, which will keep adding strain to an economy that is still recovering from the effects of rising interest rates. In August, he mentioned that the chances of a “soft landing” were estimated to be between 35% and 40%, suggesting that a recession is the more probable scenario.
Weak employment figures for July raised concerns that the U.S. economy might be on the verge of a downturn, sending the stock market lower. Likewise, August employment numbers sent the U.S. equity market a lower kick, starting the worst months for stocks.
While Fundstrat’s equity strategist, Tom Lee, expects the stock market to run into some turbulence on valuation levels getting out of hand, he expects pullbacks to present some of the best buying opportunities. Lee expects up to 10% pullbacks as investors navigate one of the most important months for stocks.
While the analyst believes investors should be cautious over the next eight weeks, it might be one of the best times to pay attention to undervalued cyclical stocks to buy. Cyclical stocks are poised to receive a significant boost on the U.S. Federal Reserve cutting interest rates in a bid to prevent the economy from plunging into recession.
While Lee believes the uncertainty over the U.S. election could add to the layer of uncertainty, any up to 10% pullback would provide an ideal entry-level, especially for value cyclical stocks.
In an interview with CNBC, Carl Weinberg, Chief Economist at High-Frequency Economics, reiterated it would take much more than the current weakness in the economy for the Fed to trigger a panicked 50 basis point rate cut. Nevertheless, any panic that comes into play with the Fed cutting by more than 25 basis points would present an opportunity to continue holding the best cyclical stocks that remain resilient amid such uncertainties.
Our Methodology
For this article, we scoured through Yahoo Finance stock screener to find stocks in all the cyclical sectors with price-earning ratios of under 15. Next, we shortlisted our list to 10 stocks with Buy or better ratings with the highest average analyst price targets on September 11. The analyst ratings were taken from TipRanks, and the stocks are listed in ascending order based on their average price target upside potential.
At Insider Monkey, we are obsessed with 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 wide and imposing view of a supply chain distribution center, illustrating the company’s technology capabilities.
JD.com (NASDAQ:JD)
Forward PE ratio as of September 11: 6.56
Average Analyst Price Target Upside Potential: 46.61%
Number of Hedge Fund Holders: 59
JD.com (NASDAQ:JD) is an internet giant that operates as a supply chain-based technology. It offers computers, communication, consumer electronics products, home appliances, and general merchandise products.
While online retailing remains JD.com (NASDAQ:JD) ‘s biggest source of revenue and earnings, the company’s logistics arm is also experiencing tremendous growth amid a recovering global economy. The company is also benefiting from a Chinese economy that is showing signs of recovery, as depicted by higher consumer spending.
The company is also benefiting from resorting to low prices for products that keep customers returning for more. Its growing scale and operating leverage allow it to offer significant discounts, keeping customers happy on its platform.
As its e-commerce operations have seen increasing success and financial gains, JD.com (NASDAQ:JD) has ventured into new sectors such as logistics, healthcare, and financial technology. These diversifications introduce the tech behemoth to fresh prospects, particularly as the rivalry in the e-commerce sector grows due to the emergence of platforms like Pinduoduo and Douyin.
JD.com (NASDAQ:JD)’s second-quarter earnings for 2024 highlighted its robust growth trajectory, setting the stage for another year of exceptional earnings and cash flow. It delivered $40.1 billion in revenues driven by robust performance across its main business areas. Improvements in operations led to a notable jump in adjusted operating income, hitting $1.6 billion.
As a result, the profit margin grew to 5% from 3% the year before. This growth also led to a 29% increase in operating cash flow, reaching $6.98 billion, compared to $5.43 billion in the previous year. Furthermore, the company’s free cash flow rose by more than 45% to $6.82 billion.
With JD’s financials continuing to surge against a stagnant share price, the stock’s undervaluation gap has kept widening. The stock is trading at a price-to-earnings multiple of 6.5, affirming a crazy low undervaluation, given the robust underlying growth.
According to the Insider Monkey database, 59 hedge funds held stakes in JD.com (NASDAQ:JD) by the end of the second quarter. Based on 12 Wall Street analysts, JD is a buy with an average price target of $38.09, implying a 46.61% upside potential from current levels.
Ariel Investments’ Ariel Global Fund discussed JD.com, Inc. (NASDAQ:JD) in its Q1 2024 investor letter, stating:
“We initiated a position in China-based technology-driven E-commerce company, JD.com, Inc. (NASDAQ:JD). The brand has long been known across the region as a superior online shopping channel due to its unique first-party model and unparalleled fulfillment service underpinned by JD Logistics. Yet, a challenging macro environment drove shares lower as shoppers began seeking bargains. In response, the company made significant investments in elevating its third-party merchant platform to enhance its variety of product offerings and price competitiveness for consumers. We believe these actions will yield an improved product mix, stronger top-line growth and margin expansion on a go-forward basis.”
Overall JD ranks 3rd on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of JD 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 JD, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
