While it is important to monitor companies’ valuation metrics, from price-to-earnings (P/E) ratios to discounted cash flows to growth metrics, it is even more important to contextualize them in the current macroeconomic environment.
Each of these stocks has an upside that makes them attractive candidates for the undervalued stock category, especially after the market decline in early August.
ADS of Alibaba Group Holding Ltd. (NASDAQ: BABA)
According to July data from China’s National Bureau of Statistics (NBS), the global manufacturing hub saw per capita disposable income rise 5.4% year-on-year. Similarly, retail sales of consumer goods rose 2.7%, while value-added services rose 4.8% year-on-year.
Most notably, China’s rural retail sales rebounded, rising 4.6%, while urban ones rose 2.4% year-on-year. This is all good news for Alibaba’s bottom line. China’s version of Amazon has not only the equivalent Alibaba Cloud, but also Taobao and Tmall as its dominant e-commerce platforms.
Similarly, Alibaba’s logistics network Cainiao can handle more shipments for higher handling fees. Above these lower tiers, Alibaba’s Alipay stands as a fintech layer that competes with Tencent’s WeChat but still dominates with a 54% market share in the mobile payments space.
Alibaba’s forward P/E is 9.6 versus a trailing P/E of 20.79. This suggests an optimistic forecast, as a P/E cut in half would imply higher earnings per share growth if the stock price remained the same. In its second-quarter results in June, Alibaba reported 4% year-over-year revenue growth to $33.47 billion.
Although Alibaba’s net profit fell 27% to $3.3 billion, Alibaba International Digital Commerce Group (AIDS) recorded an impressive 32% year-on-year growth to $4 billion, alongside Cainia’s 16% and Cloud’s 6% revenue increases. This also shows the company’s growing international presence, especially in cloud-based AI training, compared to heavyweights such as AWS, Microsoft, Google and Oracle.
With a current price of $79.69 per share, BABA stock is just above the 52-week average of $77.88 per share. According to Nasdaq forecast data, the average price target for BABA is $109.53, indicating a potential upside of 37.4%Interestingly, even the lowest forecast value of $85 is above the current price level, making BABA one of the most undervalued stocks.
Nucor Corporation (NASDAQ:NUE)
As the largest domestic steel producer, Nucor is dependent on future steel demand. Considering that Nucor is a major supplier of steel products to all branches of the military and tensions in the Middle East are escalating, it is reasonable to expect Nucor’s profit to increase significantly.
In addition, a second term for former President Donald Trump would be another boost for Nucor. After already imposing steel tariffs on China and other countries during his first term, Trump hinted at increasing tariffs in his podcast appearance in June.
Although Nucor’s second-quarter net sales declined 11% year-over-year to $16.21 billion, the company beat quarterly earnings per share estimates by 16%. Nucor ended the quarter with $5.43 billion in cash and cash equivalents, providing a solid base for “expansion into steel-related downstream market positions.”
The company’s P/E ratio is 15.11 versus a P/E ratio of 10.83. Compared to the 52-week average of $167.67, NUE stock price is currently at $148.12 per share. Nasdaq’s forecast data puts NUE’s average price target at $185.57, indicating a potential upside of 25.3%. Nucor’s lowest price forecast of $170 is well above the current stock price.
Portfolio Recovery Associates Group (NASDAQ:PRAA)
Given the rapidly increasing number of defaults, investors should consider turning to companies that specialize in consumer debt collection. PRA not only purchases (bad) debts at reduced interest rates, but also negotiates debt repayments and offers debt relief services.
As a testament to PRA’s proactive approach, the company even had to pay a $24 million fine to the Consumer Financial Protection Bureau (CFPB) in March 2023 after being accused of using illegal debt collection methods.
In its second quarter financial results, PRA reported a 13% increase in cash revenues to $473.9 million. The difference in net income for the year was stark, at $24.9 million compared to a net loss of $62.4 million in the six months to June last year.
PRA’s trailing P/E was 225.30 versus a forward P/E of 119.05. At the current price of $22.80, PRAA stock is just above the 52-week average price of $21.88 per share. Nasdaq’s forecast puts the average price target for PRAA at $30.5, indicating a 30% potential upside.
PRAA’s low estimate of $28 is also above the current price level, making the stock another undervalued stock.
What metrics do you like to use to measure the fair value of companies? Let us know in the comments below.
Disclaimer: The author does not own or have a position in any securities discussed in the article.
About the author
Tim Fries is co-founder of The Tokenist. He holds a BS in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior associate on the investment team in RW Baird’s US private equity division and is also co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
