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 MGM Resorts International (NYSE:MGM) 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).
Aerial shot of an entertainment resort, its buildings and gaming amenities sprawling along the seafront.
MGM Resorts International (NYSE:MGM)
Forward PE ratio as of September 11: 11.59
Average Analyst Price Target Upside Potential: 59.33%
Number of Hedge Fund Holders: 44
MGM Resorts International (NYSE:MGM) is one of the top consumers cyclical stocks for gaining exposure into the resorts and casino space poised to receive a boost on interest rate cuts. The company operates casinos, hotels, and entertainment resorts in the United States and internationally. Its casino operations include slots and table games, as well as online sports betting and iGaming through BetMGM, which should receive a boost on consumer purchasing power edging higher on lower interest rates.
The outlook is improving for MGM Resorts International (NYSE:MGM) following prolonged periods of pandemic restrictions; its profit-generating casinos in the Chinese special administrative region of Macao are now experiencing a resurgence. For instance, MGM China’s revenues were up 78% in the first quarter, over $1.1 billion.
In the second quarter, MGM Resorts International (NYSE:MGM) China’s revenues increased by 37% compared to last year’s period, reaching $1.02 billion. This increase was mainly due to the acceleration of activities after lifting travel and entry limits related to COVID-19 in the first quarter of 2023. Casino income at MGM China rose by 33% year-on-year, reaching $891 million.
MGM China’s net earnings from its properties, after adjusting for interest, taxes, depreciation, amortization, and costs related to restructuring or rent, stood at $294 million, a significant rise from the $209 million recorded in the previous quarter.
MGM Resorts International (NYSE:MGM) saw a 3.6% rise in its total revenues in Q2, hitting $4.33 billion in the second quarter. The firm saw a major expansion in its activities in Las Vegas and Macau and significant advancements in its digital and global growth plans.
MGM Resorts seems on course to sustain its rebound, affirming why it is one of the best undervalued cyclical stocks to buy, according to analysts. It is generating greater profits than its primary rivals. Additionally, an upturn in Macao and the eventual launch of its casino in Japan are expected to benefit the stock in the long run.
MGM is currently trading at a discount to the industry, with a forward 12-month price-to-earnings (P/E) ratio of 11.61, well below the industry average of 27.84x. Of the 912 hedge funds tracked by Insider Monkey, 44 hedge funds reported owning stakes in MGM Resorts International (NYSE:MGM) in the second quarter of 2024. Wall Street analysts maintain a buy rating on the stock with an average price target of $55.56, implying a 59.33% upside potential.
Overall MGM ranks 2nd on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of MGM 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 MGM, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.