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 LKQ Corporation (NASDAQ:LKQ) 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).

LKQ Corporation (NASDAQ:LKQ)

Forward PE ratio as of September 11: 10.10

Average Analyst Price Target Upside Potential: 45.20%

Number of Hedge Fund Holders: 31

LKQ Corporation (NASDAQ:LKQ) is an auto parts Company that distributes replacement parts, components, and systems used in the repair and maintenance of vehicles. It distributes bumper covers, automotive body panels, lights, mechanical automotive parts, and accessories.

LKQ Corporation (NASDAQ:LKQ) holds a significant position in the vehicle replacement parts industry. This market is somewhat consistent due to its expansion opportunities being linked to the mileage of light vehicles.

Its worldwide presence positions it as the top contender in North America and Europe. The company intends to leverage its size, accumulated through approximately 300 acquisitions, to secure a larger market share by maintaining a greater inventory of car parts than its rivals.

LKQ Corporation (NASDAQ:LKQ) is one of the best undervalued cyclical stocks to buy, according to analysts, as it is in a phase of robust growth depicted by solid Q2 2024. The auto parts company has prioritized strategic pillars of profitable revenue growth, margin enhancement, and cash flow generation while enhancing operational excellence to maximize our performance.

Consequently, revenues in the second quarter increased by 7.6% to $3.4 billion as net income dropped to $185 million from $281 million as of last year’s same quarter. Cash flow from operations and free cash flow were $213 million and $133 million, respectively.

LKQ Corporation (NASDAQ:LKQ)’s revenue growth in the past year has grown by 12.25%. Additionally, the company has demonstrated a strong gross profit margin of 39.36%, showing that it’s boosting its sales and efficiently handling its production costs, resulting in improved profitability.

During the second quarter of 2024, the company returned over $200 million to its shareholders, $125 million to repurchase shares, and about $80 million in cash dividends, affirming its ability to remain valuable to shareholders.

According to Insider Monkey’s second-quarter database, 31 hedge funds were bullish on LKQ Corporation (NASDAQ:LKQ), compared to 23 funds in the preceding quarter. Israel Englander’s Millennium Management is the leading stakeholder of the company, with 1.24 million shares worth $51.41 million.

Wall Street analysts maintain an average buy rating on the stock with a $56.60 price target, implying a 45.20% upside potential from current levels.

Aristotle Small/Mid Cap Equity Strategy stated the following regarding LKQ Corporation (NASDAQ:LKQ) in its fourth quarter 2023 investor letter:

“LKQ Corporation (NASDAQ:LKQ), a North American market leader in alternative collision repair parts with expertise stemming across used, recycled, refurbished, and remanufactured collision repair parts as well as the market for (new) aftermarket collision repair, was added to the portfolio. Overall, we believe the company maintains favorable scale advantages that allow for volume purchase discounts from suppliers and a wider distribution network, higher fill rates, and faster response times relative to competition. Furthermore, the company has made investments in improving its technology and logistics network beyond that of its smaller competitors, which we believe will further cement its market position through technological sophistication.”

Overall LKQ ranks 4th on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of LKQ 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 LKQ, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.