We recently compiled a list of the 10 Best Emerging Tech Stocks to Buy Now. In this article, we are going to take a look at where Methode Electronics Inc. (NYSE:MEI) stands against the best-emerging tech stocks to buy.
Tech Industry’s Dominance is Here to Stay
Despite the recent market volatility of September, tech stocks remain a promising investment opportunity due to their strong earnings, potential for growth driven by AI capex investments, and solid financial fundamentals.
While quite a few analysts think it’s essential to diversify your portfolio away from tech to manage risks, especially in the middle of such a fluctuating market, the sector offers significant potential for long-term sustainable returns.
We recently covered UBS Global Wealth Management head of Americas Asset Allocation Jason Draho’s opinion in another article, 10 Best Tech Stocks To Buy Right Now Under $10. He thinks that while a balanced portfolio is essential for consistent long-term gains, tech stocks should not be shied away from for the rest of 2024. Here’s an excerpt from that article:
“While he’s optimistic about the technology sector, he acknowledged that the volatility will likely persist due to concerns about export controls and AI monetization. However, several factors make this sector attractive for the rest of the year. First, companies reported strong earnings results, although they may not be as spectacular as desired. Second, the AI capex investment story has potential upside for next year. Third, from a portfolio perspective, these companies are high-quality with solid earnings and balance sheets.
He thinks that this market volatility is acyclical. The recent sell-off in the tech sector was not primarily due to economic concerns but rather to sector-specific issues. Despite this, tech giants will continue to benefit from the AI capex investment story. While there may be short-term challenges, the long-term outlook for these companies remains positive. Focusing on the tech sector, rather than the broader MAG 7, is a better strategy for investors seeking to capitalize on the AI boom.”
Just last week, Mad Money host and former hedge fund manager Jim Cramer discussed his perspective on investing in Big Tech stocks during market downturns.
He believes that major technology firms, which are integral to ongoing robust trends like data centers and accelerated computing, should be viewed as attractive buying opportunities when the market weakens, instead of the opposite sentiment. So, when markets face a pronounced slow growth, tech stocks, particularly the large-cap leaders, are something to invest in, not divest from.
Cramer pointed out that September is historically the weakest month for the market, with consistent profit-taking. But, he sees this as a circular argument rather than a sign of an economic downturn. He believes the broader selling pressure in September is due to tech stocks meeting but not exceeding expectations.
On Wednesday, Chris Verrone, a strategist at Macquarie, in a discussion about buying financial stocks when they enter an oversold condition, also talked about the underperformance of the tech sector, especially the larger, established companies due to their perceived status as bond substitutes.
Verrone suggested that rate cuts could boost cyclical sectors, but experience shows mixed results. While tech has been a leader, other sectors like consumer discretionary and staples have also shown strength.
He believes that the market’s leadership changes are due to long-term planning. He notes that larger tech companies might be struggling because they are perceived as safer investments, similar to bonds. According to him, financials have performed well this year and are a potential investment opportunity, especially given their current oversold state. However, the financial sector typically performs better in the late fall.
Methodology
To compile our list, we used the Finviz stock screener to screen for technology companies with a market cap between $250 million and $1 billion. We then selected 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 the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
Methode Electronics Inc. (NYSE:MEI)
Market Capitalization as of September 11: $349.33 million
Number of Hedge Fund Holders: 24
Methode Electronics Inc. (NYSE:MEI) is a global manufacturer of electronic components and interconnect systems with engineering, manufacturing, and sales operations in more than 35 locations in 14 countries, employing ~4,566 people worldwide. It designs, manufactures, and distributes a range of products, like connectors, switches, and sensors, across industries like automotive, medical, consumer electronics, and industrial.
The company focuses greatly on meaningful expansions. In fiscal 2025, it has over 30 program launches planned. And in fiscal 2026, there are another 20 programs to launch. Such moves improve investor sentiments as well. 24 hedge funds hold a total of 1,548,283 shares in the company as of June 30. The largest stake amounted to $16,024,729 by D E Shaw.
The first quarter of the new fiscal year 2025 recorded $258.50 million in revenue. This represents a 10.77% year-over-year decline. The loss per share was $0.31. This drop was mainly due to the roll-off of a previously disclosed EV lighting program in the company’s Auto segment. EV related sales still made up 18% of the total revenue.
The company is focused on launching several new EV programs with Stellantis, which will help offset the decline from other programs. Management expects sales to remain flat in 2025 but grow in 2026.
Despite challenges, the new CEO, Jon DeGaynor, is confident in Methode Electronics Inc.’s (NYSE:MEI) ability to improve its operations and capture value-creation opportunities, positioning it for long-term success.
Here is what Heartland Value Plus Fund has to say about Methode Electronics, Inc. in its Q1 2021 investor letter:
“The portfolio’s IT holdings boosted results and we continue to find opportunities in a variety of industries in the space. Methode Electronics, Inc. (MEI) is a manufacturer of electronic controls and components primarily for the automobile and industrial end markets and is an example of the type of business we favor.
Shares of Methode advanced nearly 10% during the period following management reporting solid quarterly results and a robust sales forecast for 2022 along with improving margins.
The company offers an attractive mix of steady revenue from an established core business and rapid growth from its electric/hybrid vehicle, which may see sales double within the next year. Additionally, Methode’s management team has been aggressive in paying down debt and has optimized costs following recent acquisitions.
With Methode shares trading at 7.5x estimates of 2022 EV/EBITDA, we believe the company is an attractive opportunity to capture growing cash flows at a price that could mitigate downside risk.”
Overall MEI ranks 6th on our list of the best emerging tech stocks to buy. While we acknowledge the potential of MEI 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 the stocks on our list 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.
