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 Li Auto (NASDAQ:LI) 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).

Li Auto (NASDAQ:LI)

Forward PE ratio as of September 11: 8.98

Average Analyst Price Target Upside Potential: 36.48%

Number of Hedge Fund Holders: 17

Li Auto Inc. (NASDAQ:LI) is one of the best undervalued cyclical stocks to buy, according to analysts, to gain exposure in the Chinese auto manufacturing business. It is one of the automakers spearheading the electric vehicle revolution in China.

The Chinese electric car manufacturer reported stronger-than-anticipated earnings for the second quarter and offered optimistic forecasts, indicating solid growth despite the evolving market conditions in the electric car industry.

The firm recorded earnings per share (EPS) of RMB1.42 ($0.20), exceeding the expectations of RMB1.33 set by analysts. Its sales increased by 10.6% year over year to RMB31.7 billion ($4.4 billion), meeting the forecast of RMB31.52 billion.

Li Auto Inc. (NASDAQ:LI) managed to sell 108,581 vehicles in the second quarter, marking a 25.5% increase compared to the same period in the previous year. Nonetheless, the profit margin on vehicles fell to 18.7% from 21.0%, mainly because of shifts in the product lineup and pricing approaches.

Li Auto Inc. (NASDAQ:LI) is one of the top cyclical stocks to pay attention to as the company is seeing strong demand for its cars. It expects to deliver between 145,000 to 155,000 vehicles, representing 38.0% to 47.5% Yoyo growth. Revenue in the third quarter is projected to increase by between 13.7% and 21.6%.

As a growth strategy, the company also plans to introduce multiple 800-volt high-voltage pure electric vehicles next year. It is in a solid financial position with a strong cash position of RMB97.3 billion and is on course to deliver over 500,000 cars by the end of the year. Additionally, Li Auto trades at a discount with a price-to-earnings multiple of 8.

The number of hedge funds holding Li Auto Inc. (NASDAQ:LI) dropped from 29 to 17, reflecting a decline in interest among hedge funds. However, Li Auto is a cyclical stock rated as a Buy with an average price target of $26.82, implying 36.84% upside potential from current levels.

Overall LI ranks 7th on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of LI 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 LI, check out our report about the cheapest AI stock.

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