We recently compiled a list of the 10 Best Undervalued Stocks To Buy Now. In this article, we are going to take a look at where WESCO International, Inc. (NYSE:WCC) stands against the other undervalued stocks.
Demographic Shifts and AI Innovation: A Bullish Case For the US Market
In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.
On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today’s market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.
In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.
Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.
Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.
Our Methodology
For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? 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 team of professionals operating high and medium voltage project design.
WESCO International, Inc. (NYSE:WCC)
Forward PE as of June 24: 10.6x
Number of Hedge Fund Holders: 50
WESCO International, Inc. (NYSE:WCC) offers business-to-business distribution, logistics services, and supply chain solutions and operates through Electrical & Electronic Solutions, Communications & Security Solutions, and Utility and Broadband Solutions segments.
WESCO’s focus on strengthening its balance sheet and cash flow are some of its key growth catalysts. The company made significant strides in reducing its net debt by improving its financial leverage to 2.6x EBITDA, which is close to its target range of 1.5 to 2.5 times. Over the twelve months ending March 31, 2024, the company generated over $1.4 billion in free cash flow and showed its ability to convert net income into cash flow effectively. Despite supply chain disruptions in recent years, WESCO’s strategic investments in working capital have begun to normalize and are contributing to its strong cash flow performance.
Moreover, WESCO has raised its full-year free cash flow outlook to between $800 million and $1 billion, surpassing 100% of adjusted net income at the midpoint. This increased cash flow guidance provides the company the flexibility for further share repurchases, debt reduction, or even strategic mergers and acquisitions.
In the first quarter of 2024, WESCO experienced margin pressures due to reduced supplier volume rebates and unfavorable inventory adjustments. However, the recent decline in its stock price has made the company’s valuations significantly favorable, compared to its peers. WESCO is trading at a forward PE of 10.6x as of June 24 compared to its peer average of 20x and the current industry average of 24.5x. In conclusion, despite the pressures faced by the company, it could experience some significant growth catalysts over the longer term and its current valuation could provide an entry point to new investors.
In the first quarter, 50 hedge funds held positions in the stock worth $2.12 billion. As of Q1, Leonard Green & Partners is the top investor in the company and has a position worth $1.1 billion.
Diamond Hill Capital stated the following regarding WESCO International, Inc. (NYSE:WCC) in its first quarter 2024 investor letter:
“Among our bottom individual contributors in Q1 were WESCO International, Inc. (NYSE:WCC) and Extra Space Storage. Leading industrial distributor WESCO (WCC) has experienced choppier results as the initial benefits from its Anixter merger have moderated and a cyclical showdown has highlighted some execution missteps. However, we believe that over the long term, WCC can leverage its significant scale to take market share and improve margins. The company is also well-positioned to benefit from several secular tailwinds, including electrification and re-shoring, among others.”
Overall WCC ranks 4th on our list of the best undervalued stocks to buy. You can visit 10 Best Undervalued Stocks To Buy Now to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of WCC 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 WCC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.
