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 Aptiv PLC (NYSE:APTV) 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 closeup of a hand holding a car engine component, highlighting the precision of the company’s engineering.
Aptiv PLC (NYSE:APTV)
Forward PE ratio as of September 11: 8.79
Average Analyst Price Target Upside Potential: 38.13%
Number of Hedge Fund Holders: 38
Aptiv PLC (NYSE:APTV) is a company that designs, manufactures, and sells vehicle components. It also provides electrical, electronic, and safety technology solutions to the automotive and commercial vehicle markets. The company also develops innovative solutions that enhance the safety, environmental sustainability, and connectivity of transportation.
It is one of the best undervalued cyclical stocks to buy, according to analysts, as it is one of the companies ushering in the next generation of active safety autonomous vehicles. Even though there was a decrease in spending on electric vehicles (E.V.) and sophisticated driver-assistance technologies (ADAS) areas, Aptiv PLC (NYSE:APTV) reported its highest profits for the second quarter of 2024, even though its revenue fell by 2%.
Revenue in the second quarter totaled $10 billion as net income totaled $1.16 billion, leading to a net income margin of 11.6%. This achievement was mainly because of strong performance and lower expenses related to the supply chain.
Aptiv PLC (NYSE:APTV) is trading at low earnings multiple, with an adjusted P/E ratio of 9, suggesting that the stock might be undervalued relative to its earnings capacity. Likewise, the company has already confirmed a $5 billion buyback program as part of an effort to return value to shareholders.
In the second quarter, 38 hedge funds held long positions in Aptiv PLC (NYSE:APTV), with a combined stake value exceeding $1 billion. Impax Asset Management was the largest shareholder, owning 6.23 million shares. Based on 15 Wall Street analysts, Aptiv commands an average buy rating and a $90.31 price target implying, 38.13% upside potential.
ClearBridge Investments mentioned Aptiv PLC (NYSE:APTV) in its first-quarter 2024 investor letter. Here is what it said:
“Stock selection in the consumer discretionary sector was the leading detractor from relative performance, driven by idiosyncratic issues within a handful of holdings. Automotive parts supplier Aptiv PLC (NYSE:APTV) faced pressure as headwinds to the broader auto-cycle and a slowing in electric vehicle adoption weighed on margins. However, we believe that the company’s above-market growth, combined with opportunity for margin expansion, are compelling at its current valuation as the auto-cycle rebounds.”
Overall APTV ranks 6th on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of APTV 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 APTV, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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