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 PDD Holdings Inc. (NASDAQ:PDD) 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 close-up of a customer using the company’s e-commerce platform whilst shopping online.
PDD Holdings Inc. (NASDAQ:PDD)
Forward PE ratio as of September 11: 6.56
Average Analyst Price Target Upside Potential: 79%
Number of Hedge Fund Holders: 86
According to analysts, PDD Holdings Inc. (NASDAQ:PDD) is one of the top undervalued cyclical stocks to buy to diversify an investment portfolio into the internet retail space. Domiciled in Dublin, Ireland, it operates as a multinational commerce group offering consumer products in various categories, including agricultural produce, apparel, food and beverage, electronic appliances, furniture, and household goods.
The company’s competitive edge stems from carrying most of its business in China and, therefore, exposure to a massive marketplace. Its discount marketplace has carved a niche targeting shoppers in lower-tier cities.
PDD Holdings Inc. (NASDAQ:PDD) also took advantage of its early surge in growth to introduce an online platform focused on agriculture, bridging the gap between farmers and consumers directly. This direct-to-consumer model allows PDD to offer fresh produce at significantly reduced prices compared to conventional supermarkets. Additionally, this move has established PDD as a key player in the agricultural sector, a notable position that Alibaba and J.D. were missing.
Between 2018 and 2023, PDD experienced an impressive compound annual growth rate (CAGR) of 80%. In contrast, Alibaba’s growth rate was a more modest 20% from fiscal 2019 to fiscal. The company is projected to register market share growth between 2023 and 2026 in China, and it should see its revenue grow at a compound annual growth rate of 38%. Likewise, its net income is expected to grow at a CAGR of 47%, which should allow it to generate more shareholder value.
In its second quarter of 2024, PDD Holdings Inc. (NASDAQ:PDD) delivered an 86% year-over-year revenue increase to RMB 97 billion as it successfully shrugged off stiff competition and global uncertainties. Adjusted operating net income was up 139% to $4.48 billion, leading to adjusted earnings per share of $3.20, up from $1.45
The stock is trading at 6 times its forward earnings, a dirt cheap multiple for investors eyeing exposure in the Chinese e-commerce landscape.
According to Insider Monkey’s second quarter 2024 database, 86 hedge funds included PDD Holdings Inc. (NASDAQ:PDD) in their portfolios.
On the other hand, analysts on Wall Street rate the stock as a Buy with an average price target of $166.58, implying a 79% upside potential from current levels.
Here is what Baron Funds, an investment management company, said about PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
Overall PDD ranks 1st on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of PDD 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 PDD, 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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