In this article, we discuss the 10 best undervalued stocks according to hedge funds. If you want to skip our detailed analysis of these stocks, go directly to the 5 Best Undervalued Stocks According to Hedge Funds.
There is a lot of concern around the economic impact of the Russian invasion of Ukraine on markets in the United States. Amid high inflation and a sharp downturn in growth compared to 2021 levels, this concern has assumed greater urgency. However, market experts like Mickey Levy of Berenberg expect the US economy to withstand the impact of the invasion as job gains remain above analyst estimates, the travel industry rebounds from pandemic woes, and consumer spending output increases steadily.
Data analytics platform Earnest Research has reported that consumer spending in the US in the first two weeks of February was up more than 7% compared to the same period in 2021, a huge jump compared to the 2.7% year-over-year rise registered in January. Citigroup economists predict that February numbers for unemployment will fall to around 3.8% as the US economy adds more than 500,000 jobs during the month. Morgan Stanley has predicted that these numbers will be even better at 3.7% and 750,000.
In this overall economic environment, it might be prudent for investors to identify some undervalued stocks for capital gains as a looming interest rate hike threatens growth-related offerings. Some of the top undervalued stocks to buy according to hedge funds include Verizon Communications Inc. (NYSE:VZ), Laboratory Corporation of America Holdings (NYSE:LH), and Wells Fargo & Company (NYSE:WFC), among others discussed in detail below.
Our Methodology
These were picked using the Price-to-Earning (PE) ratios. Stocks that have a PE ratio of around 15 were preferred for the list. The business fundamentals and analyst ratings of each company are also discussed to provide some additional context.
Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each company.
Best Undervalued Stocks According to Hedge Funds
10. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 71
PE Ratio: 14.35
Exxon Mobil Corporation (NYSE:XOM) is a Texas-based integrated oil and gas firm. Hedge funds have been piling into the stock recently. At the end of the fourth quarter of 2021, 71 hedge funds in the database of Insider Monkey held stakes worth $5.3 billion in Exxon Mobil Corporation (NYSE:XOM), compared to 64 in the previous quarter worth $4.6 billion.
On January 19, RBC Capital analyst Biraj Borkhataria upgraded Exxon Mobil Corporation (NYSE: XOM) stock to Sector Perform from Underperform and raised the price target to $90 from $70, underlining that overall tailwinds for the firm were likely to outweigh company-specific in 2022 amid a prolonged and strong commodity cycle.
Just like Verizon Communications Inc. (NYSE:VZ), Laboratory Corporation of America Holdings (NYSE:LH), and Wells Fargo & Company (NYSE:WFC), Exxon Mobil Corporation (NYSE: XOM) is one of the stocks that investors are flocking to as inflation rises.
In its Q1 2021 investor letter, Harding Loevner highlighted a few stocks and Exxon Mobil Corporation (NYSE:XOM) was one of them. Here is what the fund said:
“We felt that our remaining energy holding, Exxon Mobil Corporation (NYSE: XOM), with its stronger balance sheet, was in a better position to ride out the cyclical slump in oil demand and even perhaps take advantage of it by investing counter-cyclically. While Exxon Mobil Corporation (NYSE: XOM) does plan to increase capital expenditure, we’ve been disappointed in its regrettable failure to address ongoing emission trends, which reflects poorly on management’s foresight. As a result, we sold our Exxon Mobil Corporation (NYSE: XOM) holdings.”
9. Micron Technology (NASDAQ:MU)
Number of Hedge Fund Holders: 83
PE Ratio: 14.05
Micron Technology (NASDAQ:MU) makes and sells memory and storage products. On February 24, Citi analyst Christopher Danely maintained a Buy rating on the stock with a price target of $120, outlining that DRAM products, one of the key sources of revenue for the company, would enter higher pricing in the second quarter of 2022.
Hedge funds concur with this bullish analysis of Micron Technology (NASDAQ:MU) despite a mass exodus from growth stocks in recent weeks. At the end of the fourth quarter of 2021, 83 hedge funds in the database of Insider Monkey held stakes worth $5.5 billion in Micron Technology (NASDAQ:MU), compared to 63 in the previous quarter worth $3.8 billion.
In its Q1 2021 investor letter, Bonsai Partners, an asset management firm, highlighted a few stocks and Micron Technology (NASDAQ:MU) was one of them. Here is what the fund said:
“Micron Technology (NASDAQ:MU) is a manufacturer of memory semiconductor chips. Micron appreciated 17.3% during the quarter.
With the semiconductor cycle in full swing, sentiment continued to improve for major DRAM and NAND suppliers. Spot pricing for DRAM continues its upward march due to supply shocks across the industry and sustained demand levels that continue to outstrip supply.
As a result, Micron Technology (NASDAQ:MU) showed improving results for the fiscal first quarter, raised guidance intra-quarter for the fiscal second quarter, and offered strong guidance for the fiscal third quarter in both growth and margins.
While the cyclical nature of DRAM hasn’t changed, the cycles themselves continue to become more benign, leading to long-term economic improvement across these businesses. Micron Technology (NASDAQ:MU) is now continuously profitable, with industry players in a dramatically stronger position than even just five years ago.
The biggest negative surprise in the quarter came from Micron’s exit from its 3D XPoint hybrid memory business. The company also announced its decision to sell its accompanying Utah fab. Fortunately, this development does not alter the investment thesis much since 3D XPoint was an option ticket for future growth. While it’s unfortunate this product didn’t pan out, now is an excellent time to sell a fab, so perhaps it is a blessing in disguise?”
8. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 84
PE Ratio: 12.87
Bank of America Corporation (NYSE:BAC) provides banking and financial products. There is positive hedge fund sentiment around the stock as interest rates rise. At the end of the fourth quarter of 2021, 84 hedge funds in the database of Insider Monkey held stakes worth $47 billion in Bank of America Corporation (NYSE:BAC), compared to 72 in the previous quarter worth $46 billion.
Even though rising interest rates bode well for Bank of America Corporation (NYSE:BAC), the Russian invasion of Ukraine has pushed investors towards government bonds, lowering Treasury and bond yields. This has hurt financial stocks like Bank of America Corporation (NYSE:BAC). However, as interest rates rise in March, the stock is set to climb higher in the coming weeks as earnings increase.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Bank of America Corporation (NYSE:BAC) was one of them. Here is what the fund said:
“Higher long-term interest rates supported financials such as Bank of America Corporation (NYSE:BAC), which has shown both defensive and offensive characteristics in the past year. We believe it continues to be the least risky large bank from a credit standpoint, with conservative underwriting and controlled risk taking, a leading consumer deposit franchise, scale and technology. It is also a leader in its commitments to sustainability, or as it terms it, responsible growth. Disclosure and reporting at all levels form a large part of this commitment, including gender diversity and equality, environmental commitments and support of communities in which it operates. In the first quarter Bank of America Corporation (NYSE:BAC) announced it is setting a goal of net-zero greenhouse gas (GHG) emissions in its supply chain and operations, and notably also in its financing activities, before 2050.”
7. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 83
PE Ratio: 12.59
Pfizer Inc. (NYSE:PFE) makes and sells biopharmaceutical products. As the demand for the COVID-19 vaccine and booster shots made by the firm decline in 2022 due to falling cases around the globe, the company is planning to release Paxlovid, a COVID-19 treatment pill, that could fight this reversing sales trend and generate over $20 billion for the company in the coming months.
Pfizer Inc. (NYSE:PFE) is one of the top biopharma stocks on Wall Street. At the end of the fourth quarter of 2021, 83 hedge funds in the database of Insider Monkey held stakes worth $5 billion in Pfizer Inc. (NYSE:PFE), up from 74 in the preceding quarter worth $2.6 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Pfizer Inc. (NYSE:PFE) was one of them. Here is what the fund said:
“Our underweights in health care and staples contributed to relative performance during the period. As we continue to focus the portfolio on high-conviction ideas, we sold Pfizer Inc. (NYSE:PFE) in late 2020, in the health care sector.”
6. FedEx Corporation (NYSE:FDX)
Number of Hedge Fund Holders: 64
PE Ratio: 12.22
FedEx Corporation (NYSE:FDX) provides transportation and business services. It is of the top value stocks on the market. At the end of the fourth quarter of 2021, 64 hedge funds in the database of Insider Monkey held stakes worth $2.4 billion in FedEx Corporation (NYSE:FDX), compared to 49 in the previous quarter worth $1.6 billion.
FedEx Corporation (NYSE:FDX) has a dividend history stretching back close to two decades. On February 11, the company declared a quarterly dividend of $0.75 per share, in line with previous. The forward yield was 1.25%.
In addition to Verizon Communications Inc. (NYSE:VZ), Laboratory Corporation of America Holdings (NYSE:LH), and Wells Fargo & Company (NYSE:WFC), FedEx Corporation (NYSE:FDX) is one of the value stocks that institutional investors are buying.
In its Q3 2021 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and FedEx Corporation (NYSE:FDX) was one of them. Here is what the fund said:
“Our weakest Q3 performers included FedEx Corporation (NYSE:FDX). Shares of FedEx, a global shipping and logistics firm, were held back by disappointing business results as labor cost headwinds and air network disruptions overshadowed solid top-line trends. We think the company should be able to overcome these near-term issues. Importantly, FedEx Corporation (NYSE:FDX) has strong pricing power as it operates in a consolidated global shipping industry. In September, the company announced it would increase its shipping rates by an average of 5.9% across most of its services, which is the first time in several years that its annual increase would exceed 5.0%. The industry’s renewed pricing discipline is a welcome change, reflecting a broader commitment to earn better returns on invested capital. FedEx Corporation (NYSE:FDX) is also closer to fully integrating TNT, a European-focused parcel company it acquired in 2016. The market is beginning to incorporate a higher probability FedEx will fully integrate TNT, which will provide a significant boost to profits. The stock now trades at a near-trough multiple of less than 12X 2022 earnings, so we added to our position on weakness.”
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Disclosure. None. 10 Best Undervalued Stocks According to Hedge Funds is originally published on Insider Monkey.
