We recently compiled a list of the 7 Cheap Hot Stocks To Invest In Now. In this article, we are going to take a look at where Phinia Inc. (NYSE:PHIN) stands against the other cheap hot stocks.
Value Opportunities
Small-cap stocks seem to be set for growth, driven by anticipated rate cuts and strategic stock-picking opportunities. Analysts have noted that these stocks still remain undervalued compared to larger counterparts, and continued rate cuts and confidence in a soft landing for the economy could enhance their performance. In easier words, the outlook for small-cap stocks remains bullish amid changing economic conditions and anticipated monetary policy shifts. Investors are encouraged to focus on strategic stock selection to capitalize on potential earnings growth in this sector as market dynamics evolve. Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, talked about this earlier in an interview on CNBC, expressing that she expects small-cap stocks to grow further. We covered this discussion in our article on the 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts, here’s an excerpt from it:
“Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts… Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.”
But small-caps aren’t the only undervalued sector right now, as GLOBALT Investments senior portfolio manager, Keith Buchanan, mentioned on Wealth! at Yahoo Finance, on October 7. In a recent market update, stocks were slipping as traders digested a hotter-than-expected Consumer Price Index report. With over 90 minutes into the trading day, investors were looking for the next big catalyst, which many believe will come from the upcoming earnings season. To discuss these themes, Keith Buchanon noted that while the excitement around AI seems to be waning, there are still significant opportunities in other sectors.
Buchanon pointed out that earnings expectations have shifted from mid-single digits to mid-double digits for the upcoming year. He emphasized that the fourth quarter is expected to mark a transition from lower healthy growth to more robust growth. This change is not solely due to AI but also reflects broader revenue growth across various sectors, including industrials and energy. He expressed enthusiasm about the potential for earnings growth to stabilize as it expands beyond traditional sectors like technology and consumer services.
When asked about specific sectors to watch as 2024 approaches, Buchanon indicated a shift in focus from AI-centric stocks to more traditional value spaces. He mentioned financials as one sector already benefiting from increased investor interest. Additionally, he highlighted industrials and consumer discretionary sectors as areas that have been overlooked and offer attractive valuations compared to the broader S&P 500.
Buchanon also reflected on the broader market context, noting that the S&P 500 had gained 34.4% over the past 12 months ending in September 2024. Despite various geopolitical tensions, including elections and conflicts around the world, he emphasized that these events are factored into their investment strategies. He drew parallels between current geopolitical risks and those seen in 2021 when inflation became a pressing concern following Russia’s invasion of Ukraine.
He acknowledged that while they do not make trades based solely on election outcomes, they consider all incoming information that could impact economic consensus when advising clients. Buchanon’s approach emphasizes a long-term perspective in navigating current market volatility and positioning portfolios for future growth.
Buchanon’s opinion helps investors prepare for earnings season and consider opportunities beyond the AI narrative that has dominated discussions over the past couple of years. With a focus on value sectors and a broadening investment strategy, he is positioning for potential growth as we head into 2025.
Methodology
We used Finviz to compile an initial list of the top stocks with a year-to-date performance of over 30%. Then we narrowed down to 25 stocks that had a forward price-to-earnings ratio under 15. We then selected the 7 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.
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).
An aerial view of a modern industrial plant with pollution control equipment visible in the frame.
Phinia Inc. (NYSE:PHIN)
Year-to-Date Performance as of October 11: 47.90%
Forward Price-to-Earnings Ratio: 9.52
Number of Hedge Fund Holders: 35
Phinia Inc. (NYSE:PHIN) is a leading provider of advanced components and systems for combustion and hybrid propulsion, providing solutions that optimize performance, increase efficiency, and reduce emissions in commercial, light, and industrial vehicles. It offers fuel injection systems and aftermarket products, serving customers like original equipment manufacturers and various industries.
In the second quarter of 2024, the company generated $868 million in revenue, slightly below market expectations, due to increased standalone company costs, foreign exchange losses, and lower sales. Still, the aftermarket business remained resilient, particularly in Europe. The Fuel Systems segment faced challenges due to weaker-than-expected commercial vehicle sales in Europe and lower light vehicle sales in China. Margins remained strong in both Aftermarket and Fuel Systems, at 15.1% and 10.1%, respectively.
On September 12, it introduced a new electronically controlled common rail injection system for small off-highway diesel engines. This innovative technology helps reduce emissions and improve fuel efficiency, supporting customers in meeting regulatory standards. The system is designed for use with Kohler Engines and is compatible with various off-highway applications.
The global commercial and light vehicle markets are experiencing a slight downturn, partially offset by slower growth in EVs. Despite this softening, internal combustion engines remain crucial for achieving carbon neutrality. Phinia Inc. (NYSE:PHIN) is proactively investing in alternative fuel solutions such as ethanol, biofuels, e-fuels, and hydrogen. The strategic focus on improving internal combustion engine efficiency, coupled with its diversification into commercial vehicles and aftermarket segments, positions the company well for long-term growth.
Ariel Focus Fund stated the following regarding PHINIA Inc. (NYSE:PHIN) in its first quarter 2024 investor letter:
“Manufacturer of premium fuel and electrical systems, Phinia Inc. (PHIN) also traded up in the period on solid earnings results and a positive full year 2024 outlook. Healthy consumer pricing, new business wins across all end markets, ongoing weakness in electric vehicles, growth in light vehicle original equipment and strong cost controls, more than offset disappointing commercial vehicle sales in China. Meanwhile, management continues to prioritize capital returns to shareholders via buybacks and dividends. Looking ahead, we expect PHIN to deliver sustainable, profitable growth and significant cash generation as it captures operational efficiencies, exits agreements with its former parent company BorgWarner Inc. and also expands its industrial and aftermarket customer base.”
Overall PHIN ranks 5th on our list of the cheap hot stocks to invest in now. While we acknowledge the potential of PHIN 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 PHIN 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.