5 Cheap Stocks Hedge Funds Are Bullish On

A ‘Conviction Buy’ stock rating means the analyst is confident that his bet will be profitable and return positive gains. This rating represents the analyst’s resolute conviction about the trustworthiness of his analysis. . Thus, a Conviction Buy rating is not used too frequently by analysts, but it always gets the maximum attention for obvious reasons. Famous investment firm Goldman Sachs differentiates between a ‘Buy’ and ‘Conviction Buy’ and keeps updating its list of the latter rating. In this article we will analyze some of the stocks which the firm thinks are conviction buys and undervalued. We will also assess hedge funds’ sentiment around these stocks by using our comprehensive database of 750 hedge funds.

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Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).

Chevron Corporation (NYSE:CVX)

Goldman Sachs raised Chevron Corporation (NYSE:CVX) to ‘Buy’ from ‘Neutral’ and set a price target of $118. The firm thinks the stock is good for investment due to Chevron’s cash flow and production prospects in 2017 and 2018 as it expects rebound in oil prices to $50-$60/bbl. In October, Morgan Stanley also upgraded Chevron to ‘Overweight’ from ‘Equal Weight’. For the third quarter, Chevron reported EPS of $0.68 and $30.14 billion revenue, better than the estimated EPS of $0.37 and $29.05 billion revenue. 53 hedge funds tracked by Insider Monkey were long Chevron Corporation (NYSE:CVX), as of the end of the third quarter. Ken Fisher’s Fisher Asset Management owned around 3.6 million shares of the company.

Goldman Sachs upgraded Zayo Group Holdings Inc (NYSE:ZAYO) to ‘Conviction Buy’ from ‘Buy’ and set a price target of $39. The firm thinks that the company is “attractively valued” and expects a major revenue growth from its cloud platforms related to the telecom infrastructure. Goldman thinks the shares of the Colorado-based company are currently trading at a discount, and this presents an attractive investment opportunity. For the fiscal first quarter, the company reported EPS of $0.06 on $504.9 million revenue, versus the forecasts of $0.05 EPS and $510.99 million revenue. At the end of the third quarter, 50 hedge funds out of 742 funds in our database were bullish on Zayo Group Holdings Inc (NYSE:ZAYO), up from 41 funds a quarter earlier.

Pandora Media Inc (NYSE:P) was added to Goldman’s conviction buy list in October, and the firm also upped its price target for the media company to $19 from $17. For the third quarter, Pandora reported $0.07 loss per share, worse than the expected $0.06, while revenue of $351.9 million also fell short of consensus of $366.33 million. David Goel and Paul Ferri’s Matrix Capital Management reported ownership of 22.74 million shares of Pandora Media Inc (NYSE:P) at the end of the third quarter. It is one of the 50 hedge funds in our database that had long positions in the company as of the end of the third quarter.

Flex Ltd (NASDAQ:FLEX) was upped to Conviction Buy by Goldman Sachs in October. The firm thinks that the company’s diversification in business and prospects in “soft goods” such as sneakers provide bright opportunities in the future. Goldman has set a price target of $16 for the Singapore-based electronics company. The stock has gained over 25% year to date. At the end of the third quarter, 31 hedge funds in our database were bullish on Flex Ltd (NASDAQ:FLEX). Larry Robbins’ Glenview Capital owns 38.97 million shares of the company.

Last but not least, analysts at Goldman Sachs think Juniper Networks, Inc. (NYSE:JNPR)’s new switching products increase its chance of getting a chunk of high-end of lucrative data center switching segment. The firm thinks that the California-based networking company has better business prospects than Cisco and Arista Networks. Its new modular switches could get the attention of Google, Facebook, Amazon, which are already using the company’s routing equipment. A total of 27 hedge funds tracked by Insider Monkey were bullish on Juniper Networks, Inc. (NYSE:JNPR), as of the end of the third quarter. The stock is down 0.6% year to date.

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