We recently published a list of The 16 Most Undervalued Stocks You Should Buy Now. In this article, we take a look at the position of UBS Group AG (NYSE:UBS) compared to other undervalued stocks.
With the U.S. stock market hitting record highs, largely due to significant contributions from major technology sectors, domestic and global investors continue to monitor market dynamics to capitalize on potential opportunities. Therefore, it is important to identify undervalued stocks as they can offer significant value given the high valuations across all sectors.
Concentration of the S&P 500
Thanks to the “Magnificent 7” stocks that caught investors’ attention in 2024, the market capitalization concentration of leading U.S. stocks is the highest in decades. Strategists at Goldman Sachs estimate that the 10 largest U.S. stocks now account for about 33% of the market value of the S&P 500 index, well above the share of about 27% reached at the peak of the tech bubble in 2000.
The current concentration contributed to a period of strong returns in the U.S. market. The market has delivered an annualized total return of ~16% over the past five years. This compares to the 30-year annual average of 10%. According to Goldman Sachs, the top 10 stocks accounted for over a third of this gain. However, “today’s top stocks trade at lower valuations than the largest stocks at the height of the tech bubble in 2000.”
Despite good returns, investors are concerned about the extremely high level of market concentration compared to the recent past.
There are apparent similarities between current conditions and the 1973 and 2000 episodes. The labor market appears to be in decent shape, and concentration has increased along with robust stock market returns. In those episodes, the peak of stock market concentration also led to the peak of a bull market, and the U.S. economy faced recession fears in the following year.
However, the experience of 1964 shows that a sustained bull market can continue to rise despite declining market concentration. After market concentration peaked, stock prices and the U.S. economy remained stable for a long time.
Are US stocks overvalued or undervalued?
Valuations of the largest stocks are well below previous peaks. Currently, the top 10 stocks continue to trade at a collective P/E of ~25x, well below the top valuations of the largest stocks in 2000, 2020, and mid-2023.
Valuations are also lower when you consider the premium at which the largest stocks trade compared to the rest of the market. That said, the ~35% valuation premium today is still well below the 80% premium seen in mid-2023 and the 100% premium in 2000. Although the degree of market cap concentration is actually higher today than at the 2000 peak, the largest stocks trade at much lower multiples than they were during the tech bubble.
Our methodology
We used the Finviz screener to create the list of 16 most undervalued stocks to buy now. We created a shortlist of stocks that are expected to report earnings growth this year and have a P/E ratio of less than ~21.66x (since the market is trading at a P/E ratio of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why do we care about the stocks hedge funds invest in? The reason is simple: Our research has shown that we can outperform the market by mimicking the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (Further details can be found here).
A close up of financial documents and computers in a modern office environment.
UBS Group AG (NYSE:UBS)
Forward P/E as of August 22: 20.83x
Number of hedge fund owners: 33
Expected EPS growth this year: 350.99%
UBS Group AG (NYSE:UBS) is the world’s largest asset manager and is the product of several mergers over the years. In addition to wealth and asset management, the company operates a universal bank in Switzerland and a global investment bank.
UBS Group AG (NYSE:UBS) reported net income of $2.9 billion in the first half of 2024, with a return on common equity tier 1 (CET1) of 9.2%. The company’s management highlighted successful progress in the integration of Credit Suisse and a commitment to complete the process by the end of 2026. UBS Group AG (NYSE:UBS) posted strong performance in its core businesses and is on track with capital return plans such as dividends and buybacks.
The company is now focused on reducing its costs by concentrating on migrating client accounts and platforms. In particular, integration-related expenses are expected to represent approximately 70% of total costs to achieve 2026 efficiency targets by year-end. Following the Credit Suisse acquisition, the company continues to make strong progress, maintaining a healthy financial position and moving closer to its integration targets.
In the second half of 2024, UBS Group AG (NYSE:UBS) is expected to unlock the next phase of cost, capital, financing and tax benefits as a result of the acquisition. Three analysts have rated the stock as “Hold” and four analysts as “Buy”. 33 of 920 hedge funds tracked by Insider Monkey held shares in UBS Group AG (NYSE:UBS) at the end of the second quarter.
Patient Capital Management, a value investing firm, published its fourth-quarter 2023 investor letter and mentioned UBS Group AG (NYSE:UBS). Here’s what the fund said:
“UBS Group AG (NYSE:UBS) is a name we opportunistically bought following the banking crisis earlier this year. UBS benefited from buying its largest local competitor, Credit Suisse, at an 80% discount to pre-crisis prices. We bought after the deal as we believed the market’s myopic focus on short-term integration risks was not properly valuing the attractive assets. While the stock has performed well since then, we still believe it understates the company’s long-term return potential.”
Total UBS ranks 14th on our list of the most undervalued stocks to buy. While we recognize UBS’s potential as an investment, we believe some highly undervalued AI stocks promise higher returns, and in a shorter time frame. If you’re looking for a highly undervalued AI stock that shows more promise than UBS but trades at less than 5x earnings, read our report on the cheapest AI stock.
READ MORE: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley And According to Jim Cramer, NVIDIA has “become a wasteland”.
Disclosure: None. This article was originally published on Insider Monkey.
