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3 Undervalued Stocks That Are Surprisingly Cheap Right Now

Warsaw - Circa June 2021: Advance Auto Parts store. Advance Auto Parts is the largest retailer of automotive replacement parts in the US.

When investors face the current volatility and uncertainty in the stock market, it might be hard to keep a cool head and stay away from the sell button. However, this is precisely when they should scour the market for better opportunities and deals. Keeping the fundamentals front and center will always help performance, especially when everyone gets scared.

Three stocks stand out to reassure investors of good discounts on companies with solid fundamentals, even after the nontraditional leader, NVIDIA Co. (NASDAQ: NVDA), failed to reach a new all-time high and give the S&P 500 another leg higher. Making this list is consumer discretionary, arguably more of a staples play, stock Advance Auto Parts Inc. (NYSE: AAP). Along with this name is a payments platform play in the technology sector set to deliver upside, PayPal Holdings Inc. (NASDAQ: PYPL).

To finish this list, value investors can only go with a healthy amount of contrarianism. Most of the market is against investing in Chinese stocks, quoting risks that existed long before stock prices came down, making them an unjustified way to view this emerging market. Backed by some of the U.S.'s best mega investors, Alibaba Group (NYSE: BABA) is a cheap stock that shouldn't be.

Vehicle Market Cycle Could Propel Advance Auto Parts to New Highs

As of July 2024, a report by The Drive shows that vehicle repossessions in the United States have increased by up to 23% from the same period in 2023. As the consumer begins to feel the thinning effects of inflation, nonemergency items like car payments start being replaced by everyday necessities like food and shelter.

This is why the new car market might be in trouble in the coming quarters, but that also spells good news for the used car market. If people cannot trade their used car for a new one, then there is still a constant that will happen with their current vehicles, and that is parts and maintenance.

That’s where Advance Auto Parts comes into play and why Wall Street analysts expect to see up to 53.5% earnings per share (EPS) growth for the stock in the next 12 months.

More than that, those at Evercore have leaned on this momentum to place a price target of up to $60 a share on the stock.

Advance Auto Parts would have to rally by as much as 32.4% from where it trades today to prove these valuations right. The company’s financials show a gross margin of over 39%, which speaks volumes of where the upside in the stock could come from, as management can retain more capital on hand to reinvest into further growth.

Interest Rate Cuts Could Drive PayPal Stock Growth Beyond Expectations

The Fed has started to print money again, as the M2 money supply in the United States is expanding again on an annual basis. Its balance sheet is also beginning to grow as assets are bought. This is English for more liquidity hitting the market in the coming quarters.

This is good for stocks like PayPal, as more money flows through the economy and lower interest rates boost small business activity, which is one of PayPal’s main user bases. Knowing that all of this upside and tailwinds are blowing behind the company, management did the unthinkable.

Projecting up to $5 billion in free cash flow (operating cash flow minus capital expenditures) is one thing, but promising to use 100% of this free cash flow for stock buybacks is another optimistic case entirely.

This buyback is more aggressive today than ever, representing roughly 7% of the company’s market capitalization.

This has helped Wall Street analysts land on a forecast for 10.6% EPS growth in the next 12 months for PayPal stock and giving those at Mizuho the confidence to place a $90 price target on PayPal stock, calling for up to 24.3% upside from where the stock trades today.

A Contrarian Bet on Alibaba: Could It Be the Best Play in China?

Michael Burry is only one of the mega investors betting on China’s recovery. Ray Dalio, manager of the world’s largest hedge fund, has also been allocating capital into the iShares MSCI China ETF (NASDAQ: MCHI) since the fourth quarter of 2023.

Realizing that Alibaba has tapped into the data centers of the world’s fastest-growing middle classes is one bull case. Still, the main case lies in its ownership of the Chinese retail and wholesale market, which is starting to show signs of recovery after the government's repeated waves of stimulus measures.

Positive – and rising – inflation in China for every month of 2024 helps build the case for management to approve a buyback program as big as $25 billion.

Looking to buy back up to 13% of the company’s market capitalization is as bullish a view as it gets.

This is why analysts at Susquehanna see the stock trading as high as $130 for their initial price target, calling for up to 56% upside from where it trades today. Considering the stock made an all-time high of over $300 a share during the low interest rate cycle of 2020-2021, investors could believe there is much more to have over these current price targets.

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