We recently published a list of 10 Worst Affordable Stocks To Buy Right Now. In this article, we are going to take a look at where Advance Auto Parts, Inc. (NYSE:AAP) stands against other worst affordable stocks to buy right now.
How is the Market Performing Entering the Rate Cuts
In one of our recent articles regarding the 10 Hot Penny Stocks On the Move, we discussed how the overall macroeconomic conditions have played a crucial role in building an environment leading to the upcoming Fed rate cut. Here’s an excerpt from the piece:
“The economy of the United States has stabilized, the risks of a recession have been delayed, and inflation continues to cool down. On August 30, Reuters reported that the Federal Reserve received a fresh confirmation regarding inflation continuing to ease. The personal consumption expenditure price index rose 2.5% year-over-year in July and inflation has stayed within the 2% goal set by the Fed. Fed Chairman has indicated that the “time has come to cut rates”.
Moreover, in another report by Reuters on the same day there were reports of the US dollar gaining as another key inflation measure fell in line with the forecasts. The Fed is expected to cut rates by 25 basis points this month. Moving forward markets have forecasted 100 bps of cuts by the end of 2024.
The stock market is already riding the tide of expected interest rate cuts. On August 20, CNBC reported that the stock market was climbing yet again, putting the S&P 500 and NASDAQ on track for their eighth positive session in a row, marking their longest winning streak this year.”
While there has been a debate about a 25-point or a 50-point cut, the market has fluctuated before the announcement. On September 17, CNBC reported that the S&P 500 was lower after reaching a record high on Tuesday. The market reached a new record high of 5,670.81 and was down 0.1% at 5,627. The Nasdaq moved 0.1% higher whereas the Dow Jones fell by 40 points.
The traders have overcome the summer headwinds and moved past the concerns over the health of the US economy on the back of expectations of the Fed cutting interest rates. On the other hand, Wall Street has been on hold. Analysts are hoping the rate cuts will help boost the earnings growth for companies.
Tom Lee, Fundstrat Global Advisors co-founder, joined CNBC to talk about how the market is expected to perform moving into the fed rate cuts and after the announcement. Lee believes that one of the factors leading to confusion among investors is the election period. The market is expected to stay in a fluctuating environment for the next eight weeks until the elections are over. However, fed rate cuts are coming at a crucial time to give some positive for the market.
There are two main reasons leading up to the rate cuts, one being the inflation easing and the other being the slower labor market that needs help from the Federal Reserve. Moreover, Lee thinks that regardless of the Fed deciding on a 25-point or 50-point cut, the result is going to be positive for the market. He thinks that investors should be confident for the next 12 months as whenever the Fed cuts rates, the win ratio for the markets has been almost 100%. Moreover, the markets rally post-elections regardless of who takes the seat.
Our Methodology
For compiling the list of 10 worst affordable stocks to buy right now, we used the Finviz stock screener. We set our filters to get affordable stocks with high short interest i.e. stocks trading below the market average Forward P/E which is 23.79, expecting positive earnings growth this year, and have high short interest. From the list of affordable stocks, we selected 20 stocks that were most widely held by institutional investors. Once we had the aggregated list, we ranked them based on their Short % of Shares Outstanding, sourced from Yahoo Finance. Please note that the list is ranked in ascending order of the short interest.
Why do we care about what hedge funds do? 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 manufacturing facility floor filled with an array of automotive parts and accessories.
Advance Auto Parts, Inc. (NYSE:AAP)
Forward P/E Ratio: 19.24
Earnings Growth This Year: 336.00%
Number of Hedge Fund Holders: 39
Short % of Shares Outstanding: 15.81%
Advance Auto Parts, Inc. (NYSE:AAP) is an auto parts company in North America. It serves both industry operators and DIY customers. The company has approximately 4,785 stores and 320 Worldpac branches in the United States and sells parts from various original equipment manufacturer brands.
The company has been facing a series of market challenges which has led to a decrease of 29.26% in the share price over the past year. The stock short interest as a percentage of outstanding shares is also high at 15.81%, resulting in Advance Auto Parts, Inc. (NYSE:AAP) ranking among the worst affordable stocks to buy right now.
However, management has been constantly working towards making changes to improve its profitability. It has placed greater emphasis on the ongoing Advance blended box initiative, which aims to improve operational efficiency and sales of the company.
During the second quarter of 2024, the company announced the sale of Worldpac for $1.5 billion, leading to a stronger balance sheet and an indication of management’s focus on the profitable segment only.
Investors are looking forward to the strategic measures paying off for the company. Institutional investors have kept their holdings steady for the first two quarters of 2024. Advance Auto Parts, Inc. (NYSE:AAP) was held by 39 hedge funds in Q2 2024, with total stakes worth $653.03 million. Third Point is the top shareholder of the company with a position worth $94.6 million.
Moreover, AAP is also undervalued at current levels because it is trading at 19 times its forward earnings while the market average is at 23. Analysts also expect its earnings to grow by 336.00% this year to reach $2.18.
Cove Street Capital Small Cap Value Fund stated the following regarding Advance Auto Parts, Inc. (NYSE:AAP) in its Q2 2024 investor letter:
“We have three new more material positions added in the quarter. Advance Auto Parts, Inc. (NYSE:AAP) is the third wheel in a very profitable industry of retail/commercial selling of replacement auto parts. Autozone and O’Reilly have shown how to do this well whereas AAP has shown how NOT to. We think new management, a new Board, and a fiendishly simple strategic plan is a path toward a double in the stock price. We consider the downside here to be boredom if the “fiendishly simple” part proves to be more durable than we anticipate.”
Overall AAP ranks 3rd on our list of the worst affordable stocks to buy right now. While we acknowledge the potential of AAP as an investment, our conviction lies in the belief that some 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 AAP 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.