We recently published a list of 10 Wonderful Stocks to Buy Now at a Fair Price. In this article, we are going to take a look at where General Dynamics Corporation (NYSE:GD) stands against other wonderful stocks to buy now at a fair price.
In H2 of the year so far, there are signs that the S&P 500 index has been broadening beyond technology leadership and the index is reverting to a more normalized state. This means that there are several high-quality stocks outside of the popular names and investors are required to be diversified. This diversification should not be limited to the style level, but also to the stock level. Market experts opine that the AI theme has largely fuelled the narrow market. This concentration, along with an increase in passive investments, resulted in a significant cycle of consensus positioning and stretched valuations. This led to the vulnerability in the market, which resulted in a sharp correction in July and early August.
As per Fidelity International, when it comes to passive investing in the S&P 500, it demonstrates nearly a third of holdings in only 7 stocks. Considering their dominance, a stumble in performance means the index will see a significant impact, and the investors have already seen some mega-cap technology names that are unable to deliver on strong expectations.
S&P 500 Index – Transition and Concentration
The US equities saw an outstanding performance in H1 2024, with the S&P 500 Index rising 15.3%, as per ClearBridge Investments (A Franklin Templeton Company). The investment firm believes that solid earnings results and fiscal stimulus mitigated the influence of higher interest rates. However, the headline performance numbers, aided by a ramp-up in mega-cap stocks and, more specifically, semiconductor leadership, eclipsed the recent signs of deterioration below the surface.
Since the Mag 7 stocks have disproportionately driven earnings growth over the previous 2 years, ClearBridge Investments expects a rebound in earnings among small-cap stocks in the upcoming 12– 18 months. The investment firm believes that small-cap companies have seen the impacts of higher rates. In 2023, profits for Russell 2000 companies declined ~12%. This year, they are up ~13.6%, and for 2025, the projections hover at around ~31%. If this happens, there might be a broadening of the market which should provide an opportunity for active managers.
Opportunities Apart from Magnificent Seven
Companies that are unable to meet hefty expectations might see a disproportionate sell-off, and the stocks riding the wave of AI might be significantly exposed considering the amount of capital deployed versus the uncertain future environment. Given such trends, Fidelity International believes it is unsurprising that so far in H2 2024, there have been signs that the S&P 500 is broadening beyond tech leadership, with some non-tech sectors surpassing the broader market.
There are abundant high-quality stocks apart from the popular names. This means that dozens of companies in the S&P 500 continue to offer a return on invested capital (ROIC) and earnings growth of more than 30%. This is true for several other quality metrics, reflecting an underappreciated depth of opportunity in the broader US equities.
While diversification remains critical, even looking beyond the Magnificent Seven might not necessarily offer the required diversification considering that the US market remains heavily weighted towards growth sectors like IT. As per Fidelity International, diversified portfolios need negative correlations between assets, but few styles provide consistent negative correlations to quality growth companies. That being said, cyclical value and defensive value remain 2 key exceptions.
To get a negative correlation, the investors are required to avoid an overlap at the stock level. As of now, the US market provides a range of attractive stock opportunities that offer this valuable diversification.
As per ClearBridge Investments, the top 5 stocks now constitute ~27% of the S&P 500 and the top 10 make up ~37%. As per the investment firm, this concentration might stagnate near current levels, with mega caps delivering solid, but slower, earnings growth in comparison to the recent past. The investment firm expects that diversified portfolios should outperform in the upcoming 12–18 months.
With this in mind, we will now have a look at 10 Wonderful Stocks to Buy Now at a Fair Price.
Our methodology
We first sifted through multiple online rankings and ETFs to identify quality stocks with wide moats. Next, we selected stocks that were trading at a forward P/E of less than ~23.65x (since the broader market trades at a forward multiple of ~23.65, as per WSJ). The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
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).
An aircraft maintenance team in a hanger working on a modern business jet.
General Dynamics Corporation (NYSE:GD)
Expected Earnings Growth: 20.7%
Number of Hedge Fund Holders: 48
Forward P/E Multiple (As of September 30): 18.48x
General Dynamics Corporation (NYSE:GD) operates as an aerospace and defense company worldwide.
Market experts opine that General Dynamics Corporation (NYSE:GD) continues to enjoy a wide economic moat, given its diversified product portfolio and regulatory barriers. Furthermore, the company’s military systems like the M1 Abrams tank and Virginia class nuclear submarines continue to act as long-standing products of the US national defense.
General Dynamics Corporation (NYSE:GD) is expected to see significant growth in cash generation in H2 2024. The company also anticipates a strong Q4, projecting the expiration of accelerated depreciation. It recently highlighted that Gulfstream’s wiring issue with the G700 has largely been resolved, and margin improvement should come in the upcoming quarters. Also, General Dynamics Corporation (NYSE:GD)’s munitions orders are anticipated to rise in the next couple of years, reflecting the current threat environment.
The company is confident about Gulfstream’s higher margins over the long term and strong pipeline of orders. General Dynamics Corporation (NYSE:GD) is aiming for an FCF conversion rate approaching 100% for the current year. In Q2 2024, the company saw revenue of $12 billion, reflecting a rise of 18% as compared to Q2 2023. The operating margin came in at 9.7%, implying a 20-basis point expansion from the year-ago quarter, with strength seen in the Technologies and Combat Systems segments. The company’s business has been focusing on the disciplined execution of its programs, cost, and schedule.
Analysts at Morgan Stanley raised shares of General Dynamics Corporation (NYSE:GD) from an “Equal-weight” rating to an “Overweight” rating. They have increased the price target from $293.00 to $345.00 on 9th August. Notably, 48 hedge funds were long General Dynamics Corporation (NYSE:GD), as per Insider Monkey’s Q2 2024 database of 912 hedge funds.
Overall, GD ranks 8th on our list of Wonderful Stocks to Buy Now at a Fair Price. While we acknowledge the potential of GD 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 GD 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.