We recently published a list of 10 Most Promising Penny Stocks According to Hedge Funds. In this article, we are going to take a look at where Peloton Interactive Inc. (NASDAQ:PTON) stands against other most promising penny stocks.
Value in Small-Caps
With the current resilience of the bull market, there is optimism surrounding the potential for the S&P 500 to close at 5,700 or higher by year-end, as pointed out by some experts. This positive outlook is driven by expectations of the Fed cutting interest rates and stimulus measures being implemented in key global markets. The interaction between monetary policy, geopolitical factors, and market sentiment will be crucial in shaping market dynamics in the coming months. Investors are encouraged to stay informed as they navigate this evolving landscape. Tom Lee, Fundstrat co-founder, appeared on CNBC a few days back to discuss the staying power of the current bull market. His overall market outlook was discussed in one of our other articles, 8 Most Profitable Penny Stocks To Invest In, here’s an excerpt from it:
“…He attributed this potential growth to a dovish Fed beginning to cut rates and the stimulus measures being implemented in China, which he believes will positively impact the market. With significant cash still on the sidelines, Lee sees a favorable environment for stocks over the next 3 to 12 months.
Despite Lee’s bullish outlook, he acknowledged that small-cap stocks have exhibited weakness since the Fed began raising rates. He noted that while small caps are within a few percentage points of their all-time highs, they have not performed as well as expected. The market’s current risk appetite is mixed, and with the upcoming election and elevated oil prices contributing to uncertainty, investors may be hesitant to take on new risks.”
However, on October 11, Sebastien Page of T. Rowe Price joined ‘Closing Bell’ on CNBC to discuss the bullish case for international small caps. Sebastien Page expressed a cautiously optimistic outlook for the stock market as the year progresses, particularly in light of a hotter-than-expected Consumer Price Index report. Page indicated that he is looking for opportunities to add risk heading into year-end, aligning with the sentiment that while many investors are comfortable with economic fundamentals, they remain uneasy about high valuations. He noted that the investment committee at T. Rowe Price shares this perspective, emphasizing a balanced approach where they are more likely to add to risk assets rather than reduce exposure in the coming months.
Page highlighted that their current strategy includes a slight overweight of half a percent in stocks compared to bonds, which marks an increase in risk appetite compared to previous conversations over the last 18 months. He acknowledged that while the overall market multiple may appear expensive, it is skewed by the largest market-cap stocks. This suggests that there are still opportunities beyond mega-cap names, which have become too consensus-driven and costly.
Addressing concerns about valuations, Page pointed out that while the price-to-earnings ratio appears high, it is essential to consider the context. He mentioned that if one adjusts for return on equity, current valuations may fall below historical medians. Additionally, he noted that the average stock globally trades at a P/E of about 13, which aligns with its long-term average. This indicates that while some segments may seem overvalued, many stocks are positioned reasonably relative to their historical performance.
When discussing international small-cap stocks, Page explained that despite macroeconomic challenges outside the US, international small-caps offer compelling fundamentals. He highlighted that these stocks have a return on equity that is twice as high as their US counterparts, presenting an opportunity for contrarian investment. Page believes that as global markets begin to perform better amid a broader easing cycle, international small caps could play a significant role in portfolio diversification.
His insights reflect a strategic positioning for potential market broadening and highlight the importance of looking beyond mega-cap stocks to identify value in various sectors and regions. His approach suggests optimism about the market’s ability to navigate current challenges while capitalizing on emerging opportunities as we approach year-end.
Methodology
We sifted through Finviz to compile an initial list of the top penny stocks, with a share price under $5. From that list, we narrowed our choices to 10 penny stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A group of people in a fitness class with connected fitness products in a studio or gym.
Peloton Interactive Inc. (NASDAQ:PTON)
Share Price as of October 11: $4.74
Number of Hedge Fund Holders: 38
Peloton Interactive Inc. (NASDAQ:PTON) is an exercise equipment and media company with products like stationary bicycles, treadmills, and indoor rowers equipped with Internet-connected touch screens that stream live and on-demand fitness classes. It also offers a subscription service that provides access to their fitness content, including workouts, music, and meditation.
The company reported better-than-expected FQ4 2024 results. Revenue increased 0.22% year-over-year to $643.60 million, driven by a 2.3% increase in the subscription area. Per-share loss narrowed to $0.08 from $0.68. Gross profit margin improved significantly due to the closure of the Precor plant, leading to a rise in adjusted EBITDA. The improvements came as it reduced total sales and marketing expenses by 19%. The secondary market delivered a 16% increase in paid connected fitness subscribers in FQ4. Connected Fitness revenue from the treadmill portfolio grew 42%.
Earlier it had launched the half-marathon training program on Global Running Day in June. The company recently partnered with Truemed, on October 10, to allow customers to use HSA/FSA dollars to purchase Peloton equipment. This partnership aims to make fitness more accessible and affordable for consumers by providing tax-free payment options for health products and services.
Peloton Interactive Inc. (NASDAQ:PTON) is making progress on several key strategic priorities, including improving profitability, investing in innovation, and exploring capital allocation strategies. The company is also focused on delivering stronger bottom-line results to support its investments in software, hardware, and content.
Patient Capital Opportunity Equity Strategy stated the following regarding Peloton Interactive, Inc. (NASDAQ:PTON) in its first quarter 2024 investor letter:
“Peloton Interactive, Inc. (NASDAQ:PTON) declined in the first quarter, hitting its lowest per share valuation in late March since becoming a public company. The company has taken drastic action to right-size the extremely bloated cost structure, expand sales channels (Amazon, Dick’s Sporting Goods), and test other ways to reinvigorate growth. The company is hyper focused on reaching positive free cash flow generation, but the path was pushed out. We continue to believe the value of the business lives in the high-margin, sticky subscription piece of the business. We think at current valuation, the company will either successfully turn things around or be a take-out target.”
Overall, PTON ranks 3rd on our list of most promising penny stocks according to hedge funds. While we acknowledge the growth potential of PTON, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PTON but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.