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 Alibaba Group Holding Limited (NYSE:BABA) 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).
An e-commerce platform displaying a wide range of products to customers online.
Alibaba Group Holding Limited (NYSE:BABA)
Forward PE ratio as of September 11: 9.69
Average Analyst Price Target Upside Potential: 32.03%
Number of Hedge Fund Holders: 91
Alibaba Group Holding Limited (NYSE:BABA) is an internet retail giant that provides technology infrastructure and marketing reach to help merchants connect with customers. It also operates a cloud platform that offers cloud computing services and marketing and advertising services.
There is no doubt that Alibaba has underperformed in the market after peaking in 2020 at $306 a share. The underperformance has come on the company facing a myriad of issues not limited to stringent competition, slowing Chinese economy, and geopolitical tensions. Nevertheless, Alibaba has remained resilient and is the biggest Chinese internet retail giant.
Despite stiff competition, Alibaba Group Holding Limited (NYSE:BABA) controls 46% of China’s internet retail space, meaning more customers are shopping on its online platforms.
The company delivered solid first-quarter results that affirmed robust growth in its core e-commerce business and artificial intelligence. The momentum continued in the second quarter, affirming why it is one of the undervalued cyclical stocks to buy, according to analysts. E-commerce remains the company’s bread and butter as it generated $34 billion in revenues, up 4% in the June quarter, with a net income of $3.4 billion.
At the same time, Alibaba Group Holding Limited (NYSE:BABA) ‘s global e-commerce ventures, like Lazada and Aliexpress, remain a strong area, experiencing a 32% increase in sales compared to the previous year in the international online shopping sector. Alibaba’s quarterly revenues from its cloud division reached 26.5 billion Yuan, marking a 6% increase compared to the previous year, achieving the quickest expansion since the third quarter of 2022.
The company increasingly invests in artificial intelligence and offers A.I. solutions through its cloud division. Revenue from AI-related products saw a year-over-year growth rate of over 100% in the June quarter, affirming why it is one of the best undervalued cyclical stocks to buy, according to analysts for A.I. exposure. Alibaba Group Holding Limited (NYSE:BABA) stock trades cheaply with a price-to-earnings multiple of 9 and a price-to-sales (P.S.) multiple of 1, signaling potential undervaluation.
Alibaba stock currently commands an average buy rating on Wall Street with an average price target of $109.53, implying a 32.03% upside potential.
By the end of Q2 2024, 91 hedge funds held stakes in BABA, totaling $3.81 billion. As of June 30, Appaloosa Management LP was the largest shareholder, with a position valued at $756 million.
Here is what O’keefe Stevens Advisory said about Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
Overall BABA ranks 10th on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of BABA 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 BABA, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.