We recently compiled a list of the 7 Mid Cap Stocks with Low PE Ratios. In this article, we are going to take a look at where APA Corporation (NASDAQ:APA) stands against the other mid cap stocks with low PE ratios.
The stock market has experienced a surge in activity recently, driven by positive investor sentiment and key decisions from the Federal Reserve. Even though the month of September began on a volatile note, with stocks facing multiple hurdles, optimism ultimately prevailed as markets ended the quarter on a high note. Throughout this period, the Federal Reserve’s policy moves played a crucial role in shaping market dynamics. By implementing interest rate cuts, the Fed provided much-needed relief to the markets, contributing to gains in major indices. Despite the ups and downs, investors managed to navigate the turbulent waters and ended up with a more positive outlook.
The rise in investor optimism can be attributed to various factors, including strong corporate earnings, positive economic indicators, and a general belief that the Fed will maintain its accommodative stance. This period has been marked by record gains in the equity market, leaving investors hopeful for continued growth. However, despite the bullish sentiment, caution still lingers as the market enters the historically volatile month of October. Concerns over potential economic slowdowns, geopolitical tensions, and unpredictable interest rate policies remain in focus.
Amidst these market movements, interest rate fluctuations have become a critical point of discussion. The Federal Reserve’s recent rate cuts were intended to support economic activity, yet the comments from Fed officials suggest that future rate decisions are not set in stone. As the Fed Chair mentioned in a recent statement, the central bank is not in a hurry to implement further rate cuts and will remain data-dependent in its approach. This cautious stance has left investors closely monitoring economic indicators and Fed communications for signs of the central bank’s next moves.
In parallel with interest rate dynamics, the short-term funding market has also shown signs of stress. The Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing cash overnight collateralized by Treasury securities, saw a notable increase. This rise in short-term borrowing costs reflects tighter liquidity conditions, especially at the end of the month and quarter. While such fluctuations are not uncommon during these periods, the recent surge has raised some concerns about the availability of cash in the market and potential funding pressures. The market’s response to these developments has been mixed, with some strategists suggesting it might be a temporary phenomenon, while others believe it could signal more persistent challenges in the funding markets.
Another critical indicator of market liquidity, the repo rates, also experienced upward pressure. This spike in repo rates can be a sign of scarce cash for financial institutions, and if left unaddressed, it could create further uncertainty in the markets. Analysts have pointed out that while short-term borrowing costs tend to rise at quarter-ends due to balance sheet adjustments by financial institutions, the magnitude of this increase was unexpected, indicating that the market’s capacity to provide liquidity might be more constrained than initially thought.
Moving forward, market participants will be paying close attention to economic data releases and the Fed’s future guidance on interest rates. With labor market data and inflation reports due later this month, any surprises could lead to heightened market volatility. Moreover, given October’s reputation for dramatic market swings, investors are likely to adopt a more cautious approach, balancing between optimism for continued growth and concern over potential setbacks.
A recent report by Reuters highlighted that despite the current funding pressures, the Federal Reserve remains confident in its ability to manage liquidity. The introduction of facilities like the Standing Repo Facility (SRF) aims to ensure that banks and other financial institutions have access to cash when needed, reducing the likelihood of market disruptions. While Monday’s surge in SRF activity was notable, subsequent declines suggest that these pressures might be temporary. Still, the Fed’s ongoing efforts to monitor and respond to changes in the repo and short-term funding markets will be crucial for maintaining stability in the months ahead.
As the market navigates these uncertain times, many investors are looking for opportunities in mid-cap stocks that offer strong growth potential at attractive valuations. One key indicator that has drawn interest is the price-to-earnings (P/E) ratio, which can provide insights into whether a stock is overvalued or undervalued relative to its earnings. While low PE ratios are attractive, they could also indicate value traps, therefore investors should conduct their own due diligence before initiating positions.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $10 billion and having forward price to earnings (P/E) ratio of less than 5 as of October 2. We narrowed down our list to 7 stocks and ranked them in ascending order of the P/E ratio. We also examined Insider Monkey’s data on 912 hedge funds as of Q2 2024 and mention the hedge funds holdings in each stock.
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).
Workers in hard hats and safety gear processing oil and gas in a US refinery.
APA Corporation (NASDAQ:APA)
Forward P/E ratio as of October 2: 2.81
Number of Hedge Fund Holders: 31
APA Corporation (NASDAQ:APA) is a prominent independent energy company, specializing in the exploration, development, and production of natural gas, crude oil, and natural gas liquids. With operations spanning the United States, Egypt, and the North Sea, APA Corporation (NASDAQ:APA) also has exploration projects in Suriname and Uruguay. As of October 2, APA Corporation (NASDAQ:APA) stock features an attractive Forward P/E ratio of 2.81, making it a solid inclusion in the list of mid-cap stocks with low P/E ratios. The company’s strong fundamentals, coupled with its solid global presence, make it an appealing investment option.
For Q2 2024, APA Corporation (NASDAQ:APA) reported consolidated net income of $541 million, or $1.46 per diluted share, under Generally Accepted Accounting Principles (GAAP). Excluding non-core items, such as a $216 million after-tax gain on divestitures and $98 million in transaction costs related to the recent Callon Petroleum acquisition, APA Corporation (NASDAQ:APA) adjusted net income stood at $434 million, or $1.17 per share. The company also generated $200 million in free cash flow during the first half of 2024, demonstrating its strong financial health and operational efficiency.
The integration of Callon Petroleum has proven successful, with APA Corporation (NASDAQ:APA) increasing its estimate of annual cost synergies from $225 million to $250 million. These synergies are being realized through reduced overhead, improved cost of capital, and enhanced operational efficiencies. The combined company is expected to benefit significantly from cost reductions and enhanced capital efficiency in its Permian Basin operations, potentially adding $300 million in annual cash flow for every $5 change in oil price per barrel.
In terms of production, APA Corporation (NASDAQ:APA) exceeded expectations in all three of its main operational areas. U.S. oil production rose 67% compared to the first quarter, primarily due to the integration of Callon assets. Furthermore, the company anticipates strong organic production growth in the second half of the year, projecting a fourth-quarter U.S. oil output of 150,000 barrels per day, which reflects an 8% increase over the second quarter.
The number of hedge funds holding APA Corporation (NASDAQ:APA) shares declined to 31 in Q2 2024, down from 45 in the previous quarter, suggesting potential undervaluation. Given the stock’s low forward P/E ratio, strong cash flow generation, and successful acquisition integration, APA Corporation presents an enticing opportunity for investors looking for a mid-cap energy stock with robust fundamentals.
Overall APA ranks 1st on our list of the mid cap stocks with low PE ratios. While we acknowledge the potential of APA 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 APA 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.