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Is PDD Holdings Inc. (NASDAQ:PDD) the Most Undervalued Value Stock to Buy According to Analysts?
We recently compiled a list of the 8 Most Undervalued Value Stocks To Buy According To Analysts.In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against the other most undervalued value stocks to buy according to analysts.
The Concept of Value Investing
Value investing is the investment strategy where an investor tends to buy a stock for less than it is worth and holds on to it to realize its actual worth. Thus, the stock is undervalued relative to its fundamentals. CNN reports that the concept of value investing goes back almost 100 years ago to Benjamin Graham who supported using fundamental analysis to buy stocks at a discount to their intrinsic value. Value stocks are typically more mature and less volatile.
Warren Buffett is one of the top value investors who has created a lot of wealth using this strategy. During the financial crisis, Buffett bought Bank of America which is still one of his significant holdings. At Berkshire’s 2023 annual shareholder’s meeting, Buffett emphasized that new things such as tech don’t take away opportunities from value investors in response to the late vice-chairman Charlie Munger’s statement.
According to Munger, value investors should get used to making less money since a lot of them are competing for diminished opportunities. Countering this view, Buffet didn’t see fewer opportunities for value investors in the future by being more optimistic. He explained the bright value investing prospects by stating:
“What gives you opportunities is other people doing dumb things”
Value Investing in 2024
On April 25, Bill Nygren, Oakmark Funds CIO and portfolio manager, appeared on CNBC to talk about the large spread between value stocks and growth stocks. He explained how Oakmark Funds looks at things in the long term with short-term news being just noise and has a portfolio that has kept moving lower and lower in P/E even if the market has risen over the past year. The biggest opportunity is created by the unusually large spreads in P/E multiples. He emphasized how one good thing about companies trading at low P/Es is that one doesn’t have to believe that others are going to see them as good businesses.
On September 23, Nygren again joined CNBC’s ‘Squawk on the Street’ to shed light on the prevailing scenario. He stated how some academics now think that there are not enough value investors to force convergence to fair value anymore. According to him, the issue relates to the number of investors who want positive price momentum in their portfolios nowadays and don’t like to buy companies that have fallen to a cheap price.
He also talked about how the S&P 500 is not so diversified anymore and that investors would revisit the idea of it as a low-risk way to invest in equities. While the S&P 500 was an index where somebody could put the majority of their capital thinking it was reasonably diversified, the technology sector is becoming more dominant within the index. There is no reason to believe that an individual is best off if their investments match the economic production or the market value of this production. He called an S&P 500 investment a pretty heavy bet on tech the way the market is valuing tech stocks currently.
Will Value Stocks Dominate Growth Stocks in the Future?
Research by Hartford Funds has predicted a rebound for value stocks after growth stocks have dominated them, a trend that was catalyzed by the ascendence of mega-cap US tech stocks. The research revolves around how certain rules of thumb such as value’s ability to outperform being dependent on the economic cycle and value dominated by certain mature and cyclical sectors, are to be reconsidered. The research unveiled that the three factors driving value outperformance are higher inflation, higher real interest rates, and higher economic growth (real GDP), with the impact of these drivers varying from one regime to another.
The research predicts a positive outlook for the value sector over the next 3 to 5 years. Inflation is expected to remain elevated due to several factors including tight labor markets, shrinking working-age populations, rising geopolitical tensions, and supply-chain disruptions among others. Considering an environment of high inflation, real rates will be high due to the monetary policy. In such circumstances, attractive value opportunities could be found in financials such as insurance companies, asset managers, and payment services.
Regarding the assumption that value stocks are concentrated in more mature sectors, the patterns have shifted over time since value has become more diversified and less concentrated than growth. While energy and financials made up 13% and 25% of the value index 10 years ago, the value mix constitutes 20% financials, 16% healthcare, followed by 15% industrials, 13% IT, 9% consumer staples, and only 7% energy. The surprisingly large weight of IT in value is driven by industries such as hardware, semiconductors, IT services, and communications equipment while software companies are more likely in the growth sector.
The risk against this outlook for value stocks supported by structurally higher inflation and real rates as well as increased diversification is generative AI, something that can still enable growth companies to have a multiyear period of outperformance. With that being said, let’s move to the 8 most undervalued value stocks to buy according to analysts.
Our Methodology:
In order to compile a list of the 8 most undervalued value stocks to buy according to analysts, we first used a stock screener to identify value stocks with PE ratios under 20. We focused on companies trading in industries that are traditionally saturated by value companies. These industries include consumer staples, financials, energy, and materials. From the resultant dataset, we picked 8 stocks with the highest upsides, as of October 15.
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).
PDD Holdings Inc. (NASDAQ:PDD) is a multinational commerce group owning and operating a portfolio of businesses including Pinduoduo and Temu. While Temu is an online marketplace, Pinduoduo is an e-commerce platform offering products related to agricultural produce, apparel, shoes, bags, mother and childcare products, food and beverage, electronic appliances, and others. The company was incorporated in 2015.
PDD has emerged as one of the major e-commerce players in China. As stated by the investment management company, Baron Funds, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries and lowering costs. With more demand for affordable products in China complimented with small-scale merchants finding alternatives to Alibaba, PDD has driven growth. In September, PDD shares soared over 40% after China announced an economic plan to stimulate its economy. Investors looking for exposure to the Chinese e-commerce landscape can consider the stock.
For the second quarter, the company recorded total revenues of RMB97,059.5 million, up 86% year-over-year. Meanwhile, net income attributable to ordinary shareholders was RMB32,009.4 million, up 144% as compared to the prior-year quarter.
The management predicts the revenue growth to decline ahead due to external challenges and intense competition. As the firm plans to create a healthy and sustainable ecosystem, it will be investing significantly in the platform’s trust and safety to help high-quality merchants thrive which could cause potential declines in profitability.
Overall PDD ranks 3rd on our list of the Most Undervalued Value Stocks To Buy According To Analysts. While we acknowledge the potential of PDD as an investment, 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 an AI stock that is more promising than PDD, check out our report about the cheapest AI stock.
