We recently compiled a list of 8 Cheap Growth Stocks to Buy According to Analysts. In this article, we will look at where Super Micro Computer, Inc. (NASDAQ:SMCI) ranks among the cheap growth stocks to buy according to analysts.
Why Is the Market Still Volatile After Rate Cuts?
When the Federal Reserve cut rates last week there was a general anticipation that the market would rise. However, that has not been the case. Tom Lee, Fundstrat Global Advisors managing partner and head of research joined CNBC for an interview recently to talk about why the market is not performing as expected. The Federal Reserve has unleashed an easing cycle on the market, which is supposed to have a positive effect. Tom Lee believes that the market is positive historically if we look at a 3-month or a 6-month picture. However, the behavior of the market for the next 40 days is a coin flip.
Two reasons why there is volatility are first because there was some repositioning in the market due to the rate cuts and secondly the market is now entering into the 40-day election period. Tom believes that the positive effect that the rate cut was supposed to have has not vanished but is delayed until after the elections. Talking about his personal experience coming from various conferences and meetings, he thinks that a major chunk of the population doesn’t want to commit capital before the election. Moreover, it doesn’t matter who wins, but the public just wants to have the election day in their rear mirror before they take the capital out.
We recently covered an article about 7 Cheap Blue Chip Stocks to Invest in Now, where we talked about how the S&P 500 index has been overcrowded with Technology companies and has somewhat lost its diversity. Here’s an excerpt from the article:
“Turning back to how investors might revisit their idea of S&P being a low-risk investment. This idea was pitched by Bill Nygren, the Chief Investment Officer at Oakmark Funds in a recent CNBC interview. His approach reflects a strategic shift as to how investors might view the S&P 500 and mega-cap stocks in the current market situation. He pointed out that while the index has traditionally been viewed as a diversified index, in reality, it is just a bet on a few large technology companies. Currently, around half of the S&P 500 is dominated by some 25 large tech names, which essentially diminishes its original diversification.
Bill Nygren, emphasized the importance of having a more diversified portfolio beyond just mega-cap stocks. He believes that diversification of the portfolio provides better risk-adjusted returns compared to relying solely on a few big companies. We have also discussed Matt Stucky, Northwestern Mutual Wealth Management’s chief equities portfolio manager, talking about a similar strategy in 13 Most Undervalued Blue Chip Stocks To Buy According To Analysts.
The investment strategy that Nygren is vouching for suggests that the current market scenario where investors are favoring positive momentum stocks can lead to missed opportunities in other undervalued sectors such as financials and energy. He believes that the potential lucrativeness of the Tech sector has overcrowded the space creating opportunity in other sectors.”
Lee also supports the idea that the S&P 500 index is a bet on the technology sector. He believes that if the technology sector does not resume its role as the leader and declines, it is going to be difficult for the rest of the stocks to hold up.
Lee has been a fan of small-cap stocks and closely analyzes the Russell 2000 index. He acknowledges that the index has been slow, however, the fundamental investment case for small caps remains the same. Lee thinks that bottoms of the year are not always straight up and the probability of the market making record highs next year remains high. His investment thesis is to buy the dip if the market goes down during the election days as the current market condition ensures that the positive effect is just around the corner.
Our Methodology
To compile the list of 8 cheap growth stocks to buy according to analysts, we used the Finviz stock screener to aggregate an initial list of stocks. We searched for cheap stocks in various growth industries including Technology, Healthcare, Biotechnology, and Telecommunications, among others. Our criteria for “cheap” is stocks trading below the forward price-to-earnings ratio of 23.98 (the market’s forward P/E as per the Wall Street Journal) and earnings expected to grow during the year. Using this criteria we compiled a list of 20 cheap growth stocks and then ranked them as per their analyst upside potential sourced from CNN. The list is ranked in ascending order of the analyst upside potential.
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).
Super Micro Computer, Inc. (NASDAQ:SMCI)
Forward P/E Ratio: 13.89
Earnings Growth This Year: 53.50%
Analyst Upside Potential: 36.97%
Super Micro Computer, Inc. (NASDAQ:SMCI) is a technology company that specializes in providing high-performance computing solutions. It designs servers and storage systems that are used for data centers, cloud computing, 5G networking, and artificial intelligence.
Its cutting-edge products such as liquid cooling clusters and next-gen X14 Intel Xeon 6 and H14 AMD Turin systems have proved to be indispensable in the growing artificial intelligence environment. Over the past couple of years, AI has emerged as a new catalyst for the stock. We say this because the company has grown its revenue by more than 61% and its bottom line by around 121% during the past 3 years.
Super Micro Computer, Inc. (NASDAQ:SMCI) ended fiscal 2024 with a revenue of $14.9 billion almost double the previous year’s $7.1 billion. Management has speeded up its production, it is now producing 5,000 racks and more than 2,000 direct liquid cooling racks per month.
While the most recent year results are robust, what’s more impressive is its anticipation for 2025 to be another historic year, with a record number of orders, and a growing backlog of design wins. Management stays confident that it is in the right momentum to meet the demand for its AI servers.
The stock is trading at only 14 times its forward earnings, with analysts expecting its earnings to grow by more than 53% during the year. Thereby, making Super Micro Computer, Inc. (NASDAQ:SMCI) a cheap growth stock to buy according to analysts.
Carillon Scout Mid Cap Fund stated the following regarding Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter:
“Super Micro Computer, Inc. (NASDAQ:SMCI) was the top detractor to returns in the second quarter. Super Micro designs and manufacturers server solutions based on modular and open-standard architecture. This modular approach combined with a strong engineering culture helps the company to supply the market with advanced servers and rack-scale compute solutions quickly. After an impressive return in the first quarter, the company offered disappointing near-term earnings guidance, though we do not believe its long-term opportunity has diminished. We expect continued strong growth for several years, although the range of outcomes is quite wide; it is difficult to forecast AI server market growth with precision.”
Overall SMCI ranks 4th on our list of cheap growth stocks to buy according to analysts. While we acknowledge the potential of SMCI to grow, 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 a promising AI stock 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 on Insider Monkey.