In this article, we’ll discuss the 10 most promising penny stocks according to hedge funds.
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. Taking Page’s opinion into consideration, we’re here with a list of the 10 most promising penny stocks according to hedge funds.
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).
10 Most Promising Penny Stocks According to Hedge Funds
10. Ferroglobe (NASDAQ:GSM)
Share Price as of October 11: $4.41
Number of Hedge Fund Holders: 30
Ferroglobe (NASDAQ:GSM) is a leading global producer of silicon-based alloys and manganese-based alloys, specializing in the production of silicon metal and ferroalloys, essential ingredients used in various industries, including steelmaking, aluminum production, and the manufacturing of solar panels and semiconductors.
Although the company’s revenue fell by 1.18% year-over-year in Q2 2024, it still made $0.13 per share, with a total revenue of $451.05 million. The restart of French operations in April contributed to increased volumes and improved financial outcomes.
Silicon metal revenue was up 22% sequentially. Average realized prices rose 2.8%, and shipments increased 18.2% to 63,000 tons. Index prices in Europe were negatively impacted by lower-priced Chinese exports and weakened market conditions. Prices in North America were strong due to supply constraints. Silicon-based alloys revenue was down 6% from the previous quarter. Manganese-based alloys revenue increased by 48% from the prior quarter, due to higher shipments of 81,000 tons, up 31%.
The company made significant progress in its US ferrosilicon trade case, with the Department of Commerce imposing significant duties on Russian imports. This decision is expected to benefit its US ferrosilicon business by reducing competition. Additionally, the company’s testing of Coreshell nanocoating technology for EV batteries shows promising results, positioning it well to capitalize on the growing demand for high-performance batteries. Ferroglobe’s (NASDAQ:GSM) focus on innovation and product development, coupled with favorable market conditions, is expected to drive continued success.
Ave Maria Focused Fund stated the following regarding Ferroglobe PLC (NASDAQ:GSM) in its fourth quarter 2023 investor letter:
“Ferroglobe PLC (NASDAQ:GSM) was added to the portfolio in the fourth quarter. Ferroglobe is a leading manufacturer of silicon metal, which is a critical input for hundreds of industrial and consumer applications. It was formed via a merger of two companies, but the integration initially went poorly, causing a decline in the company’s stock price. New management was brought in to rectify the situation. The new team successfully completed the integration, which lowered the ongoing costs of the operations and eliminated the company’s debt. Going forward, regulations in the United States and Europe should dramatically increase the production of solar panels. Silicon metal is an irreplaceable input for solar panels, and this new demand for silicon metal will make Ferroglobe’s revenue less cyclical. Now that Ferroglobe has a fortress balance sheet, management has room to enact a large share repurchase initiative. At the time of the initial investment, the Fund was able to purchase Ferroglobe for almost half the replacement cost of its assets. The Fund exited positions in Nvidia, Tyler Technologies, and Valvoline, in part, to fund the Ferroglobe purchase and increase the position sizes of some existing holdings.”
9. Altice USA Inc. (NYSE:ATUS)
Share Price as of October 11: $2.51
Number of Hedge Fund Holders: 32
Altice USA Inc. (NYSE:ATUS) is a major cable and broadband communications provider in the US that offers a range of services, including high-speed internet, video, and phone services, to residential and business customers. It is known for its focus on providing innovative technology solutions and delivering exceptional customer service.
The company’s new management team, with a strong Comcast background, is focused on improving the company’s performance. B2B offerings and political revenue are expected to fuel growth prospects, contributing to advertising growth. It continues to invest in AI and data to enhance capabilities and customer service. Efforts to improve customer experience and operational efficiency through fiber expansion, mobile services, and AI are building a long-term growth story. Proactive network maintenance and a segmented go-to-market approach should lead to operational improvements.
In Q2 2024, the company achieved significant improvements in operational metrics, customer satisfaction, and growth in fiber, mobile, and B2B businesses. ARPU also stabilized throughout the base. This helped generate $2.24 billion in revenue, although this was down 3.59% from a year-ago period. Business services revenue was up 1.3%, while News and advertising revenue declined 7.2%. Brand awareness among prospective customers grew by 8% year-over-year in the east and by 13% in the west.
It recently launched Optimum Stream, its Android-based streaming platform, and plans to introduce new features like pause and rewind for live TV. In July, it also announced the launch of Entertainment TV, a new internet TV package, as the first of several new video bundles.
Strategic initiatives include investments in technology, customer experience, and product offerings. Despite competitive pressures, the company’s focus on operational efficiency and customer satisfaction has led to improved financial performance and positions it well for long-term growth.
Here is what MPE Capital has to say about Altice USA, Inc. (NYSE:ATUS) in its Q2 2022 investor letter:
“Two (very) costly mistakes I’ve made over the last twelve months have been my investments in Altice USA and Poshmark. Both are down over 50% from my initial purchase price. I not only poorly appraised business quality, I also incorrectly appraised the intrinsic value of both of these companies. It should rarely end up the case that we pay over intrinsic value, at worst case we should never lose money on an investment. I will dive into one of these mistakes below and maybe dive into the other in a future letter. My thinking when buying Altice USA was that they operate as a duopoly in their main footprint, the New York Tri-State area. They provide a needs-based service: internet, video, and voice services. I figured this is a very stable business with high barriers to entry. Management seemed competent as well based on historical capital allocation decisions. I didn’t fully appreciate at the time how poorly positioned they were relative to Verizon Fios, as well as how fiercely competitive the business can get on promotions and customer acquisition.
Altice offers hybrid fiber coaxial (HFC) while Fios offers fiber-to-the-home (FTTH). FTTH is a far superior product, which has led to some share loss to Fios in the parts of their footprint that overlap. There have also been some subscriber losses in their other footprint due to new cable entrants and fixed wireless offerings.
My original thinking was that the video business will go to zero overtime due to continued pressure from services like Netflix. In hindsight, I overstated their free cash flows excluding the video business due to difficulties disaggregating their business results. This FCF delta is a huge contributor to the difference between my current and original estimates of intrinsic value. Now, it’s possible that the video business doesn’t go to zero; however, I have a hard time envisioning that many households in ten years will still subscribe to linear television.
After losing some subscribers and facing some headwinds, they are now reinvesting many billions over the next few years in order to fiberize the majority of their footprint. I think this is a great plan and it will hopefully cement their position as a true duopoly in the New York TriState area. However, in their other major footprint, new fiber entrants are coming in and competition will only intensify. There are also some new entrants entering this space like Starlink satellite internet and fixed wireless internet from tier one mobile carriers. I think these will generally be more expensive and inferior to FTTH; however, they may end up putting some pricing pressure on Altice overtime.”