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 United Parcel Service, Inc. (NYSE:UPS) compared to the 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 warehouse full of parcel boxes symbolizes the company’s reliable logistics services.
United Parcel Service, Inc. (NYSE:UPS)
Forward P/E as of August 22: 16.86x
Number of hedge fund owners: 44
Expected EPS growth this year: 14.8%
United Parcel Service, Inc. (NYSE:UPS) provides logistics services. The company offers shipping, tracking, brokerage, freight forwarding, billing, and goods transportation services.
Wall Street analysts say the company is at an inflection point. Its US volume increased in Q2 2024 for the first time in nine quarters. This means that the average daily volume increased year-on-year in 11 of the top 20 export countries. The company is expected to post solid earnings growth in H2 2024. The company has seen volume growth in the US for the first time in nine quarters.
United Parcel Service, Inc.’s (NYSE:UPS) business is likely to benefit from the high barriers to entry in the courier industry. These barriers include the need for extensive transportation infrastructure and established customer relationships. Not all companies can afford to invest millions and billions in expanding the shipping network. The company plans to acquire Estafeta, which should help it expand its presence in Mexico and improve logistics coordination. It also expects to generate savings and reduce expenses through the sale of Coyote. This should help free up cash for buybacks.
For 2024, United Parcel Service, Inc. (NYSE:UPS) expects consolidated revenue of ~$93.0 billion and consolidated adjusted operating margin of ~9.4%. HSBC increased the price target on the company’s shares from $150.00 to $170.00 on the 25th.th April. They raised their rating from “Hold” to “Buy.”
ClearBridge Investmentsan investment management company, has released its investor letter for the second quarter of 2024. Here is what the fund said:
“Our holdings in industrial companies weighed on relative performance as we invested more heavily in transport companies such as the ‘part-of-load’ provider XPO and the parcel delivery company United Parcel Service, Inc. (NYSE:UPS), which has struggled with weak volumes during the post-COVID freight recession. With industry volumes back to pre-COVID levels and strong pricing power, particularly in the LTL space, we believe the next leg up will prove to be very accretive. As a result, we added to XPO during the quarter while reducing our position in UPS on concerns that industry capacity remains too high. At the same time, we are less exposed to electrical equipment stocks, which have been rewarded with the view that they will benefit from the buildout of AI data centers.”
UPS total ranks 12th on our list of the most undervalued stocks to buy. While we recognize UPS’s potential as an investment, we believe some highly undervalued AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for a highly undervalued AI stock that shows more promise than UPS but trades at less than 5 times 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.
