We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where United Parcel Service, Inc. (NYSE:UPS) stands against the other undervalued stocks.
With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.
Concentration of S&P 500
Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.
The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”
Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.
There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.
However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.
Are The US Stocks Overvalued or Undervalued?
The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.
The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.
Our methodology
We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why are we interested in 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 warehouse filled with boxes of parcels, symbolizing the companies reliable logistics services.
United Parcel Service, Inc. (NYSE:UPS)
Forward P/E as of August 22: 16.86x
Number of Hedge Fund Holders: 44
Expected EPS Growth this Year: 14.8%
United Parcel Service, Inc. (NYSE:UPS) provides logistics services. It offers shipping, tracking, brokerage, freight forwarding, billing, and goods transportation services.
Wall Street analysts opine that the company is at an inflection point. Its US volume increased in 2Q 2024 for the first time across nine quarters. With this, average daily volume went up YoY in 11 of its top 20 export countries. The company should see solid earnings growth in 2H 2024. The company returned to volume growth in the US for the first time in 9 quarters.
United Parcel Service, Inc. (NYSE:UPS)’s business is expected to benefit from the high barriers to entry in the courier industry. Such barriers include the need for extensive transportation infrastructure together with established customer relationships. Not all companies can afford to invest millions and billions in scaling up the shipping network. The company plans to acquire Estafeta and this should help it expand its footprint in Mexico and enhance logistics orchestration. Also, it expects to save from the sale of Coyote and reduce spending. This should help free up cash for repurchases.
For 2024, United Parcel Service, Inc. (NYSE:UPS) expects consolidated revenue of ~$93.0 billion and consolidated adjusted operating margin of ~9.4%. HSBC upped the price target for the company’s shares from $150.00 to $170.00 on 25th April. They raised their rating from a “Hold” to a “Buy.”
ClearBridge Investments, an investment management company, released its second quarter 2024 investor letter. Here is what the fund said:
“Our industrials holdings weighed on relative performance as we are more exposed to transports such as “less than truckload” provider XPO and parcel delivery company United Parcel Service, Inc. (NYSE:UPS), which are struggling with weak volumes during the post-COVID freight recession. With industry volumes down to pre-COVID levels and strong pricing power in the LTL space in particular, we believe that the next upcycle will prove to be very strong for earnings. As a result, we added to XPO in the quarter while reducing our position in UPS on concerns that industry capacity remains excessive. Meanwhile, we have less exposure to electrical equipment stocks, which have been rewarded by views that they will benefit from the buildout of AI data centers.”
Overall UPS ranks 12th on our list of the most undervalued stocks to buy. While we acknowledge the potential of UPS as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than UPS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.