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3 Cheap Stocks That Shouldn’t Be So

Rate Cuts

Certain stocks fall out of favor once every business cycle, whether for actual justifiable reasons or because of plain overlooking. Markets can get busy and caught up with sectors that make the most noise, such as the U.S. technology sector, which has been taken to all-time highs by names like Nvidia Co. (NASDAQ: NVDA).

Outside of this popularity contest, investors can find a few select stocks that have fallen behind the rest of the market and even their respective industries. From company-specific events to economic trends that are coming around the corner, stocks like Boeing Co. (NYSE: BA), SoFi Technologies Inc. (NASDAQ: SOFI), and even Daqo New Energy Corp. (NYSE: DQ) have some explaining to do. 

These stocks could become top picks for portfolios looking to beat the market in the coming cycle. However, they all depend on Interest rate cuts from the Federal Reserve (the Fed). 

Why the Odds Favor this Group

According to the CME’s FedWatch tool, stock market indexes have sold off recently because these potential rate cuts have been delayed until September 2024. As traders and investors had priced in these rate cuts today, delays caused the S&P 500 to retrace by as much as 5.5% in the past month. 

Despite this tantrum, some economic factors and developments suggest interest rate cuts may still be a reality. Analysts at The Goldman Sachs Group Inc. (NYSE: GS) predicted a manufacturing sector breakout this year, a thesis found in the bank’s 2024 macro outlook report

As the ISM manufacturing PMI index broke into its first expansionary reading in over a year, it seems Goldman is correct. February’s PMI shows a 6.4% jump in export orders, and foreign nations could only be interested in American exports if they expected the dollar to decline, making these future purchases cheaper. 

Because lower interest rates lower a currency's value, the manufacturing and exports trend suggests that even global traders expect cuts to come sooner rather than later. 

SoFi Stock: A Rate Cut Favorite

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The real estate market is at a standstill, with current homeowners refusing to relinquish their COVID-19 mortgages, which carry an average interest rate of 3.25%. Today’s mortgages are nearing 7.5%, making potential buyers wary of financing a home. 

More than that, the average home price rose by 31% from pre-pandemic levels, driving away potential buyers from another angle. Lower interest rates could kickstart the construction sector, a bet already taken by Warren Buffett in buying homebuilding stocks

What comes next after new homes are built, and new inventory helps to drive prices lower, is financing purchases. This is where SoFi stock comes into play, with analysts expecting to see earnings per share (EPS) growth of 225% in the next 12 months. 

Markets value these futures earnings at a forward P/E ratio of 28.3x today, which places SoFi stock at a 46% discount to other technology services stocks like Spotify Technology (NYSE: SPOT) and its 52.8x forward P/E. 

A price target of $9.1 a share calls for a net upside of 26.5% from today’s prices, reflecting the expectation of higher mortgage demand in the future and another piece of evidence helping the interest rate cut narrative. 

Rising Oil Prices? Better Call Daqo New Energy

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That’s right, oil is breaking past its previous ceiling of $80, reaching a six-month high of $90 last week. As geopolitical conflicts in the Middle East keep escalating, oil prices could continue to increase. Goldman Sachs thinks it could reach $100 a barrel this year

More expensive oil makes alternative energy sources – like solar – more attractive propositions. This is where Daqo comes to help, as it is the world’s largest polysilicon manufacturer, a key material needed for solar panels to complete the photovoltaic process. 

Projecting 73% EPS growth this year should be enough to make a stock flirt with new highs; however, because Daqo is based in China, fears and uncertainty in the nation’s equity market caused this stock to trade down to a dismal 46% of its 52-week high.

A $36.2 price target represents a 61% upside in this stock. Lower interest rates could make solar panel financing easier for buyers and boost oil demand even further on the manufacturing breakouts mentioned.

Boeing’s Hiccup, Get Past It

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Boeing shares were scrutinized after a scandal involving a 737 MAX 9 jet. The stock trades at 63% of its 52-week high despite projecting industry-leading EPS growth of 1,548% this year. While boldly bullish, these projections could be a reality. 

As interest rates come down, traveling—business and pleasure—could take off. The ISM manufacturing PMI showed that the leisure and accommodation industry expanded for a third consecutive month. Because this involves travel, airline stocks may push their Boeing orders this quarter. 

Knowing this, analysts placed a $229.3 price target on the stock, calling for a 34% upside today. Boeing’s last quarterly financial report shows that 100% of its new orders came from models outside of the affected MAX 9 jet, meaning next quarter’s fulfilled orders – accounted as earnings – could likely beat expectations. 

Despite the scandal, short interest in Boeing stock declined by 14.1% in the past month, bringing the net percentage of shares shorted down to 1.5%. Bears aren’t even buying into the ‘doom’ story surrounding Boeing planes.  

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