We recently published a list of The 10 Worst Affordable Stocks to Buy Right NowIn this article, we will analyze how Lyft, Inc. (NASDAQ:LYFT) stacks up against other stocks that are less likely to buy right now.
How does the market react to rate cuts?
In one of our recent articles on the 10 Penny Stocks on the RiseWe discuss how overall macroeconomic conditions have played a crucial role in creating an environment conducive to the next Federal Reserve rate cut. Below is an excerpt from the article:
“The U.S. economy has stabilized, recession risks have receded, and inflation continues to cool. On August 30, Reuters reported that the Federal Reserve received further confirmation that inflation is continuing to decline. The personal consumption expenditures price index rose 2.5% year-on-year in July, and inflation has remained within the Fed’s 2% target. The Fed chairman has indicated that “the time has come to cut rates.”
In addition, another Reuters report published on the same day reported that the US dollar appreciated as another key inflation indicator came in line with forecasts. The Fed is expected to cut rates by 25 basis points this month. Looking ahead, markets have forecast 100 basis point cuts by the end of 2024.
The stock market is already riding the wave of expected interest rate cuts. On August 20, CNBC reported that the stock market was climbing once again, putting the S&P 500 and NASDAQ on track for their eighth consecutive positive session, marking their longest winning streak this year.
While there has been debate about a 25-point or 50-point cut, the market has been fluctuating leading up to the announcement. On Sept. 17, CNBC reported that the S&P 500 was down after hitting an all-time high on Tuesday. The market hit a new all-time high of 5,670.81 and was down 0.1% at 5,627. The Nasdaq was up 0.1%, while the Dow Jones dropped 40 points.
Traders have weathered summer headwinds and put concerns about the health of the U.S. economy behind them, thanks to expectations that the Federal Reserve will cut interest rates. Elsewhere, Wall Street has been on the lookout as analysts expect rate cuts to help boost corporate earnings growth.
Tom Lee, co-founder of Fundstrat Global Advisors, joined CNBC to discuss how the market is expected to perform leading up to the Fed rate cuts and after the announcement. Lee believes that one of the factors causing confusion among investors is the election period. The market is expected to remain in a fluctuating environment for the next eight weeks until the election is over. However, the Fed rate cuts come at a crucial time to bring something positive to the market.
There are two main reasons that lead to rate cuts: one is the decline in inflation and the other is the slowdown in the labor market, which needs the help of the Federal Reserve. Moreover, Lee believes that regardless of whether the Fed decides on a 25-point or 50-point cut, the result will be positive for the market. He believes that investors should be confident for the next 12 months as whenever the Fed cuts rates, the success rate for the markets has been almost 100%. Moreover, markets recover after elections regardless of who takes the seat.
Our methodology
To compile the list of the 10 worst affordable stocks to buy right now, we used Finviz’s stock screener. We set our filters to get affordable stocks with high short interest, i.e. stocks that are trading below the market’s average forward P/E of 23.79, that expect positive earnings growth this year, and that have high short interest. From the list of affordable stocks, we selected 20 stocks that were held by institutional investors. Once we had the list aggregated, we ranked them based on their percentage of outstanding shares shorted, obtained from Yahoo Finance. Note that the list is ranked in ascending order of short interest.
Why do we care what hedge funds do? The reason is simple: Our research has shown that we can beat the market by mimicking the best hedge funds' best stock picks. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, outperforming its benchmark by 150 percentage points (See more details here).
A passenger and driver in a rideshare car look out the window awaiting their destination.
Lyft, Inc. (NASDAQ:LYFT)
Forward price-earnings ratio: 15.39
Earnings growth this year: 13.80%
Number of hedge fund holders: 53
% of outstanding shares shorted: 11.40%
Lyft, Inc. (NASDAQ:LYFT) operates a ridesharing platform in the United States and Canada. The platform offers a variety of transportation options by connecting drivers with customers through its Lyft app. It also has an Express Drive program where people can sign a short-term rental agreement to obtain vehicles through its subsidiary Flexdrive Services and provide ridesharing services.
It has been 5 years since the ride-hailing company went public. However, the company has faced a number of challenges stemming from a volatile market environment, tough competition from competitors like Uber, and the difficulty in maintaining a positive net profit. As a result, the stock price has taken a hit and Lyft, Inc. (NASDAQ:LYFT) is down 17.75% year-to-date.
But the story doesn’t end here. Something positive happened recently that could be a sign that the company is ready to bounce back. The Q2 2024 financial results were good news for its investors. Lyft, Inc. (NASDAQ:LYFT) hit several all-time highs during the quarter. Its gross bookings increased 17% year-over-year to $4 billion. While rides and active riders hit an all-time high of 205 million and 23.7 million, indicating an increase of 15% and 10% respectively.
The company’s liquidity position also improved significantly as it generated over $256.4 million as free cash flow during the quarter. Also, another highlight on its books was that its net profit went from a loss of $114.3 million in Q2 2023 to a positive net profit of $5 million during the last quarter.
Management expects the success to continue through the year. The number of rides is expected to grow by around 15%, with gross bookings growth slightly higher than rides for the full year. LYFT is also cheap at current levels. It is trading at 15 times its forward earnings, while the market average is around 23. Analysts expect its earnings to grow by around 14% for the year.
LYFT was held by 53 hedge funds as of Q2 2024, with total positions worth $744.96 million. Appaloosa Management LP is the largest shareholder with a position valued at $112.2 million.
ClearBridge Multi Cap Growth Strategy made the following comment about Lyft, Inc. (NASDAQ:LYFT) in its Q2 2023 Investor Letter:
“The sale of the ride-sharing provider Transportation company Lyft Inc. (NASDAQ:LYFT), similar to our moves in communication services, is trimming a smaller position to consolidate the portfolio in our highest conviction ideas. We initially bought Lyft in May 2021 when ridesharing volumes were still depressed due to COVID-19. While Lyft was clearly in second place behind Uber in domestic ridesharing, we believed it was a cleaner way to take advantage of the U.S. recovery due to the focused nature of its business. However, poor execution and the uneven nature of the U.S. recovery, with West Coast markets where Lyft has historically had greater exposure lagging due to the lack of return to office work, further weakened its market position. In March, Lyft announced that co-founder Logan Green would step down as CEO and that David Risher, a former Amazon executive, would take his place. “While Risher has laid out his ambitions to grow Lyft’s market share, we believe doing so will take more than a few quarters of fixing. Additionally, while the company has looked for areas to right-size its cost base, we see necessary investments in pricing, service levels, and product differentiation to drive this turnaround and further expand the path to improved profitability.”
LYFT in general ranks tenth on our list of the worst affordable stocks to buy right now. While we recognize LYFT's potential as an investment, our conviction lies in the belief that some AI stocks hold more promise for generating higher returns and doing so in a shorter time frame. If you're looking for an AI stock that holds more promise than LYFT but is trading at less than 5x earnings, check out our report on the stock. The cheapest AI stocks.
READ NEXT: $30 Trillion Opportunity: Top 15 Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer says NVIDIA has become a “wasteland”.
Disclosure: None. This article was originally published on Insider Monkey.
