7 Undervalued Stocks With 500% Upside Potential After Coming Rate Cuts

Stocks to buy

The stock market has been a tale of two worlds in the post-pandemic era. On one side, you have many stocks that languished and traded sideways for what feels like an eternity. On the other, are the high-flyers that soared to dizzying heights, perhaps too high for their own good.

Well, now the chickens are coming home to roost. We’re at the start of what could be a nasty correction and I wouldn’t be surprised if it turns into something more serious. All the classic recession indicators are flashing red.

The Sahm Rule, which has reliably signaled every recession in recent history, is screaming that trouble is on the horizon. Unemployment numbers are ticking up again after a period of strength. The yield curve, which was inverted for a while, is starting to normalize. Not to mention, the Federal Reserve is expected to start cutting interest rates as soon as September. Sound familiar? We’ve seen this movie before, and it usually doesn’t have a happy ending.

However, resets like these are ultimately healthy for the market. Sure, it’s painful in the short term but many solid companies could emerge from this downturn stronger than ever. That is especially true if interest rates revert to the near-zero levels of yesteryear. Here are seven undervalued stocks to look into if you think that could happen:

PayPal Holdings (PYPL)

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Global online payments platform PayPal Holdings (NASDAQ:PYPL) has wallowed at discounted prices of around $60 for quite some time, even as the underlying business grows. Management tried to reignite interest by doing huge buybacks last year and announced another one this year without success.

The main concern is PayPal’s active accounts count, which declined after the pandemic boom. However, I believe this churn is reasonable as the economy normalized and some users temporarily moved back to cards and cash. Now four years after Covid and the churn is subsiding. sequential account growth turning positive again.

Wall Street appears to be weighing the issue of active accounts too heavily, considering that PayPal has proven it can squeeze lots of money from existing users.

With revenue up 9% and EPS jumping 36% in Q2, the valuation gap between the stock and business is widening. The massively lower earnings multiple is going to give PYPL stock an edge as investors go risk-off and start looking at the bottom line more.

Analysts at BTIG just reiterated their Buy rating with a $85 target, seeing “multiple tailwinds.” I believe there is a bigger chance of a huge upside breakout in the coming quarters, potentially sparked by interest rate cuts.

Considering the low downside risk at these prices, I’d happily wait it out. It’s one of the most undervalued stocks, in my opinion.

Carnival (CCL, CUK)

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Carnival (NYSE:CCL, CUK) operates the world’s largest cruise line, capturing nearly 43% of global passenger traffic. The company has faced challenges in recent years, with shares underperforming the broader market considerably. However, Carnival is thriving financially as the pandemic’s impact fades. It reported record second-quarter revenues of $5.8 billion and bookings for 2025 enhancing revenue prospects.

Unfortunately, Carnival was one of the businesses hit hardest during COVID. The ripple effects still haunt them due to the huge amount of debt they were forced to take on in 2020, followed by steep rate hikes a year later. The company is now spending a significant portion of its operating profits on debt servicing costs.

However, I believe this situation is unlikely to persist. A September rate cut looks very likely due to struggling tech stocks and the market is overwhelmingly pricing in such a move. These rate cuts would provide huge relief to Carnival. I think the resulting increase in profits once the Fed is done could pull the stock price back up to pre-COVID levels.

Despite the challenges, analysts remain bullish on CCL. JPMorgan recently raised Carnival’s price target to $25, implying a 58.6% upside, citing strong demand and no slowdown in cruise indicators. With debt already reduced by $1.2 billion over six months and minimal maturities this year, I believe Carnival is well-positioned to capitalize on the rebounding travel industry. It could potentially deliver significant upside for investors willing to weather some near-term turbulence.

JetBlue Airways (JBLU)

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JetBlue Airways (NASDAQ:JBLU) operates as a low-cost airline in the U.S. The company has been navigating a challenging environment. Its stock price down 74% from its February 2020 peak as it deals with the lingering effects of the COVID-19 pandemic. I think it is among the most undervalued stocks in the airline industry.

JetBlue finds itself in a situation similar to Carnival. Both companies are still grappling with the ripple effects of the pandemic. However, potential rate cuts on the horizon could provide a much-needed boost. If we see oil prices decline due to the economic downturn and passenger traffic remains at manageable levels, JetBlue could be poised for a sharp recovery in the coming years. The fleet has continued to grow despite the volatility, though.

Despite the challenges, there are reasons for optimism. In its Q2 2024 earnings call, JetBlue reported beating analysts’ expectations, with earnings per share of 8 cents surpassing the consensus estimate by 18 cents. The company also generated $34 million in adjusted pre-tax income for the quarter. Management has implemented a strategy called “JetForward” to address the competitive landscape and drive the airline back to profitability.

While some analysts remain cautious, with UBS Group initiating coverage with a “Sell” rating and a $5.00 price target, others see potential. Deutsche Bank upgraded JetBlue to a “Buy” rating in February 2024, with a price target of $9.00.

Snap (SNAP)

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Snap (NYSE:SNAP), the company behind the popular social media app Snapchat, has been a disappointment among social media stocks lately. I’d only blame management for that. While most other social media companies have recovered massively and taken advantage of the rise in advertising spending, Snap’s financials and stock price have languished.

I was pounding the table on Netflix (NASDAQ:NFLX) and Meta Platforms (NASDAQ:META) back during their troughs in 2022. I really thought Snap’s management would be able to take similar steps to increase their profitability by cutting costs and boosting monetization. Unfortunately, that hasn’t materialized. Snap’s average revenue per user (ARPU) is still stuck in neutral, with most of its growth coming from its core base of young users continuing to expand.

If management can figure out how to meaningfully increase ARPU, it could supercharge Snap’s already strong user growth. The Q2 2024 earnings report showed some bright spots, with revenue up 16% year-over-year to $1.24 billion and daily active users increasing 9% to 432 million. Sadly, even that top-line growth missed estimates.

And growth isn’t everything. Snap has yet to break even on a GAAP basis. I think it can easily do that with the cash it has on hand and it is already “profitable” on a non-GAAP basis.

Despite the challenges, I remain bullish on these bargain-basement stock prices. If Snap makes smart moves toward profitability, I wouldn’t be shocked to see multibagger returns in the coming years. A social media darling this popular with a coveted young demographic shouldn’t be struggling like this. But for now, you’ll need some patience and intestinal fortitude to bet on this turnaround.

Lasertec (LSRCY)

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Japanese stocks have been on quite the rollercoaster ride in recent days. Japan had its worst day since 1987 but stocks have rebounded somewhat. Investors are talking about the Yen carry trade effect, which could have a huge impact on stocks worldwide as investors have borrowed massive amounts of money from Japanese banks and poured them into foreign markets. However, as Japan’s Yen climbs back up and the country raises rates, this is putting them deep in the red, especially as foreign markets have all started correcting.

Now, Lasertec (OTCMKTS:LSRCY) hasn’t been a big victim of this yet, but the stock has corrected by around 45% from this year’s peak. It has returned to its more historical trough prices and I think it is a good place to buy the stock. The semiconductor industry is still going strong due to the high demand for data center chips. Even if those chips start seeing a fall in demand, Lasertec can benefit through automotive chip demand being stimulated in a lower interest rate environment in the U.S.

Lasertec recently reported record first-half sales and profits for fiscal year 2024. However, the company’s full-year forecast missed analyst estimates despite a strong Q4 performance.

In my view, Lasertec is an indirect bet on the chip industry. I think the current undervaluation could be worth buying into if you believe the stock has bottomed out. LSRCY stock has found solid support at $30 many times before so I believe something similar could be happening here.

JD.com (JD)

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While most companies outside of China have seen significant e-commerce growth, JD.com (NASDAQ:JD) and its peers have experienced low single-digit growth rates. I see JD as one of the most undervalued stocks in the Chinese market right now. Once we go through the current economic reset, China’s economy could rebound, and JD.com is well-positioned to benefit from this recovery. China has historically weathered global recessions well, so if the stars align, JD.com could deliver strong performance.

It’s important to keep in mind that trading restrictions and tariffs may pose challenges for JD.com in the U.S. market. Nevertheless, I think the company can still thrive within China if the economy improves there. The Chinese market alone should provide ample opportunity for JD.com to grow and stage a comeback. What sets JD.com apart from other e-commerce players in China is its focus on quality products rather than cheap goods sold in bulk.

In Q1 2024, JD.com reported net revenues of 260 billion renminbi ($36 billion), a 7% increase year-over-year. The company also saw improvements in profitability, with operating income rising 19.8% and net income growing 13.9%.

Joby Aviation (JOBY)

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Joby Aviation (NYSE:JOBY) is an electric air taxi company that aims to revolutionize urban transportation. The company has been making steady progress toward its goal of launching commercial operations in 2025, but it’s still a pre-revenue startup facing significant challenges.

Joby formally applied for aircraft certification in Australia, seeking to validate its expected FAA-type certification there to expand globally. The company also completed an impressive 523-mile trip in a hydrogen-electric aircraft in July.

Analysts estimate it could generate $4.4 billion in revenue in 2030, but those projections are highly speculative. In Q1 2024, Joby reported a net loss of $95 million on just $25,000 in revenue from a government contract. It has the cash to handle these losses, but it’s hard to say if it can continue doing so until it turns profitable.

Personally, I see Joby as the riskiest bet discussed in this article. If you’re swinging for a 500% home run and willing to stomach the volatility, a small speculative position could make sense. But for most investors, I’d watch Joby’s progress from the sidelines for now.

On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Omor Ibne Ehsan is a writer at InvestorPlace. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks. You can follow him on LinkedIn.

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