In this article, we will look at the 7 Best Small-Cap Value Stocks to Buy According to Hedge Funds.
Today’s AI-fueled era of the “Magnificient Seven” technology stocks is dominating the US stock market. However, investing with a focus on value stocks hasn’t lost its popularity. In March, a Bloomberg report detailed how many investment firms were pouring money into value stocks, primarily in sectors like energy, financials, utilities, and materials.
Among the various investors preferring these sectors, Nanette Abuhoff Jacobson, global investment strategist of Hartford Funds, who liked stocks from these “unloved sectors,” made the list. The Bloomberg report also mentioned Presilium Private Wealth, which found value investing to be attractive in the current environment.
During the 2024 Sohn Investment Conference, billionaire David Einhorn claimed that it was a great time to be a value investor, while also continuing to say that value investing is dead as an industry. When asked about these contradictory statements, he said that the value investing industry and value investing as an investing strategy are two distinct things.
Many fund managers who were paid heavily by people to research undervalued stocks for them have lost their jobs and assets under management amid a shift to index funds where “millions of dollars were redeemed” out of those conventional strategies. But Einhorn said that this development has decreased the competition in the industry, paving the way for people like him to be in a unique position to find undervalued stocks.
Are Value Stocks a Better Choice Than Growth Stocks?
On August 16, Vahan Janjigian, CIO at Greenwich Wealth Management, joined “The Exchange” on CNBC to discuss why value stocks may perform better than growth stocks in a low-rate environment. Broadly speaking, investors seem to think that lower interest rates are better for growth stocks as compared to value stocks. Janjigian believes that it also depends upon the shape of the yield curve. With the economy stabilizing and the Fed cutting interest rates, the yield curve can potentially normalize. He says that this happening can prove better for value stocks that pay good dividends than for growth stocks that do not pay dividends.
Janjigian also says that although he invests in other stocks through ETFs, he tends to be a value investor, favoring value stocks that pay good dividends and have been growing over time. He named three of his favorites, which include Pfizer, Verizon, and IBM. Viewing these stocks as substitutes for bonds, he reflects on the similarities between the two, claiming that they are long-term investments with very good yields.
Dave Sekera, Morningstar’s Chief U.S. Market Strategist, said that the best value is in the small cap category. In a CNBC interview in August, he said that the small-cap category trades at a 15% discount to their fair value, highlighting stocks like Kraft Heinz that looked like attractive investments.
With these trends in view, let’s look at the 7 best small-cap value stocks to buy according to hedge funds.
7 Best Small-Cap Value Stocks to Buy According to Hedge Funds
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded companies with market caps between $1 billion and $10 billion (our definition of small caps) and forward P/E ratios of less than 15 as of October 1, 2024. From this list, we selected the 7 stocks with the highest number of hedge funds holders as of Q2 2024, and used that as our ranking metric. We gave preference to stocks that come from sectors like consumer, healthcare, energy, materials, and utilities.
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).
7 Best Small-Cap Value Stocks to Buy According to Hedge Funds
7. Crocs, Inc. (NASDAQ:CROX)
Market Cap: $8.60 billion
Forward P/E: 10.97
EPS Growth This Year: 6.70%
Number of Hedge Fund Holders: 40
Crocs (NASDAQ:CROX) designs, markets, distributes, and sells casual lifestyle footwear and accessories for women, men, and children under the Crocs Brand and HEYDUDE Brand segments. The Crocs Brand segment offers a collection of Croslite material, a molded footwear technology formulated to create odor-resistant, comfortable, soft, lightweight, and non-marketing footwear. The HEYDUDE Brand, in contrast, operates in more than 80 countries, and offers a collection with a versatile silhouette.
The company ranks on our list of the best small-cap value stocks to buy according to hedge funds and is running on strong fundamentals. Its enterprise initiatives are bearing fruit, expanding its growth trajectory and increasing its revenue to more than $1.1 billion in Q2 2024. This marked a record for the company. To support its long-term growth, the company is boosting awareness and global relevance for new and existing customers by igniting icons across its brands. It is also diversifying its product range methodically, attracting new customers to its brands and undertaking strategic investments to drive market share gains across its Tier 1 markets.
Crocs (NASDAQ:CROX) is also evolving its partnership model to build consumer love, drive engagement, and boost brand popularity. It celebrated SpongeBob’s 25th anniversary in Q2 by creating a SpongBob and Patrick clog, unveiling the official announcement on Las Vegas Sphere. It released a number of other partnerships as well, ranging from Pringles to Treasure, Naruto, and Minions. To expand its product range, the company is continually pushing into sneaker and lifestyle opportunities as exemplified through our Salehe Juniper sneaker release. The sneakers sold out within minutes, cropping up at secondary shopping platforms for multiples of their original price of $140. This highlights the strong consumer response to the company’s new products.
It is prioritising durable growth and building several franchises, aiming to expand the company’s standing into new usage occasions and drive new and repeat purchases. According to hedge funds, the company ranks seventh on our list of the 7 best small-cap value stocks to buy.
Choice Equities Capital Management stated the following regarding Crocs, Inc. (NASDAQ:CROX) in its first quarter 2024 investor letter:
“Shares of Crocs, Inc. (NASDAQ:CROX) and Shake Shack, Inc. (SHAK) appreciated meaningfully as recent earnings results were positively viewed and some bear point debates began to move into the rearview mirror. CROX – In the case of Croc’s, the stock continues to trade at an attractive high-single-digit multiple of earnings. Importantly, the company is making significant progress in turning the tide for HeyDude after sales of the brand hit an air pocket due to higher-than-wanted inventories in the wholesale channel last year. Inventory levels have improved, enabling average selling prices to move higher, while the new HeyDude distribution center in Las Vegas has also now become operational. Along with an expansion of HeyDude-specific outlet stores, which are very high margin and drive nearly a third of Crocs’ brand North American sales, it looks like the Croc’s playbook is nearly fully in place. And just last week, the company announced Terence Reilly would return to the company as president of the brand. Bringing Reilly back into the fold seems a very promising move. He deserves a great deal of credit for Croc’s resurgence, which he described as taking it “from meme to dream” when he was previously with the company as head of marketing from 2013 to 2020. He clearly seems to have a knack for creating buzz around a brand, given his recent success at Stanley, where he was CEO after driving sales of the famed “Stanley Cup” up ten-fold to $700M in just four years. (An insightful interview with him on his approach to marketing and management – and the back story on how Stanley went viral by giving away a car to a car collision survivor – can be found here.) It seems prospective marketing success can often be as hard to predict as it is important to a brand’s vitality. But here, it looks like Reilly is a proven winner. Might he again be able to create a sensation around a brand like HeyDude, one that has high affinity amongst existing customers yet still low-brand awareness more broadly? Given recent operational improvements, the brand seems well positioned to again focus on playing offense and improved brand performance may be right around the corner”.
6. Weatherford International (NYSE:WFT)
Market Cap: $6.21 billion
Forward P/E: 11.69
EPS Growth This Year: 26.50%
Number of Hedge Fund Holders: 43
Weatherford (NYSE:WFT) is a global energy services company that provides services and equipment necessary for the drilling, well construction, evaluation, completion, production, intervention, and responsible abandonment of wells in the natural gas and oil exploration and production industry. The company also operates in new energy platforms, and is divided into three segments: Well Construction and Completions (WCC), Drilling and Evaluation (DRE), and Production and Intervention (PRI).
WCC specializes in services and products for well integrity assurance. DRE offers an array of services, including wireline, managed pressure drilling, drilling fluids, and drilling services. PRI, in contrast, offers a suite of reservoir stimulation designs and engineering capabilities that unlock reserves and isolate zones in unconventional and conventional deep water, wells, and aging reservoirs. Its platforms span across CygNet, ForeSite, and CENTRO.
Weatherford (NYSE:WFT) is running on strong fundamentals, delivering above-expectation cash performance and margins in Q2 2024. Its adjusted EBITDA margins came in at 26%, driven by some asset sales. Despite Q2 being an interest paying quarter, it delivered free cash flow of $96 million. Revenue in the quarter grew 3.5% sequentially, experiencing a 10% year-over-year improvement with all business segments growing. The company faced certain short-term roadblocks that kept its performance at the lower end of expectations, such as the social unrest in Colombia, activity shifts in Mexico, and the Houston storm in May. These happenings adversely affected some of the company’s facilities and caused operational disruptions.
Despite such short-term headwinds, Weatherford (NYSE:WFT) is steadfastly working on margin expansion and pricing discipline. Its international business is also demonstrating strength, growing 6% sequentially and 14% year over year. This was driven by a 29% year-over-year growth in the Middle East, Asia, and North African region. Q2 marks the 13th consecutive quarter of year-over-year international revenue growth in the company, with the Middle East, North Africa, and Asia being the primary drivers. This reflects the company’s strong potential in these regions.
Weatherford (NYSE:WFT) has also made significant improvements to its balance sheet, highlighting its resilience. It repaid more than $1 billion of debt, expanded and added a credit facility, reduced interest costs by more than $100 million, and brought its net leverage ratio down to 0.5 times. It ranks sixth on our list of the top small-cap value stocks to buy according to hedge funds.
5. Jazz Pharmaceuticals (NASDAQ:JAZZ)
Market Cap: $6.88 billion
Forward P/E: 5.71
EPS Growth This Year: 7.00%
Number of Hedge Fund Holders: 44
Jazz Pharmaceuticals (NASDAQ:JAZZ) develops medicines for serious diseases. Its primary marketed products include Xywav, Xyrem oral solution, Epidiolex oral solution, Rylaze, Zepzelca, Defitelio, and Vyxeos liposome for injection. These medicines treat excess daytime sleepiness (EDS) in narcolepsy patients seven years of age or older, tepatic veno-occlusive disease (VOD), and other ailments.
Jazz Pharmaceuticals (NASDAQ:JAZZ) boasts a significant commercial presence, making Q2 2024 its largest revenue quarter ever. It generated more than $1 billion in total revenues across its growing and diversified portfolio of medicines. In narcolepsy, its product Xywav remains the number one treatment, experiencing strong patient demand. Xywav is also the first and only approved therapy for Idiopathic hypersomnia, helping the company build the market. Epidiolex has continued performance in the market for around six years, growing sales to around $247 million in Q2. These numbers highlight the potential of the company’s products.
Patient demand is continuing to increase due to several US commercial initiatives undertaken by the company. Its market expansion outside the US is also continuing rapidly. It’s oncology therapeutic area is experiencing continued growth as well, with Zepzelca having a strong quarter. Rylaze is also seeing increased utilization in the pediatric population.
Jazz Pharmaceuticals (NASDAQ:JAZZ) is undertaking initiatives to ensure that it continues on this positive trajectory. It is using a mid-to-long-term framework to ensure it allocates capital for the maximization of patient benefits and company value instead of merely maximizing near-term margins.
Aristotle Capital Global Equity Strategy made the following comment about Jazz Pharmaceuticals plc (NASDAQ:JAZZ) in its Q3 2023 investor letter:
“During the quarter, we sold our position in Magna International and invested in a new position, Jazz Pharmaceuticals plc (NASDAQ:JAZZ). Founded in 2003, Jazz Pharmaceuticals is a global biopharmaceutical company headquartered in Ireland. The drugmaker’s portfolio of nine approved products focuses on conditions with limited therapeutic treatments in neuroscience (~75% of 2022 revenue) and oncology (~25%).
Jazz’s drug Xyrem was added to its portfolio in 2005 and was approved for use in patients with narcolepsy. The drug’s strong efficacy propelled it to be the standard of care for this incurable sleep condition and has achieved wide adoption for treating excessive daytime sleepiness and cataplexy (episodes of loss of muscle control).
Xyrem’s patent exclusivity ended in January 2023, and authorized generic versions of the product have entered the market. To prepare for the patent cliff, the company developed Xywav, a lower‐sodium version of Xyrem, which is touted for its potentially better heart safety. The drug has received FDA approval for the treatment of narcolepsy and idiopathic hypersomnia and has orphan drug exclusivity through 2027…”
4. Elanco Animal Health Incorporated (NYSE:ELAN)
Market Cap: $7.26 billion
Forward P/E: 15.98
EPS Growth This Year: 3.40%
Number of Hedge Fund Holders: 44
Elanco Animal Health Incorporated (NYSE:ELAN) is an animal health company specializing in delivering services and products that prevent and treat disease in pets and farm animals. Its diverse portfolio serves animals across various species, primarily cats, dogs, cattle, swine, poultry, and sheep.
The company’s product offerings are divided into two categories: Farm Animal and Pet Health. The Pet Health portfolio specializes in parasiticides, therapeutics, and vaccines. It also offers products that grant protection from ticks, fleas, and internal parasites. Some of its products in the category include Credelio Family, Milbemax, Drontal Family, Galliprant, Trifexis, Milbemax, and others. The Farm Animal portfolio focuses on swine, cattle, and poultry, and includes an elaborate list of products. Some of these include Denagard, Baycox, Experior, Rumensin, Monteban, Baycox, Maxiban, Comforta, Catosal, and others.
The company is running on strong financials and delivered solid Q2 2024 earnings that exceeded the top end of its guidance range on key metrics. These include revenue, adjusted EPS, and adjusted EBITDA. It is operating on four consecutive quarters of revenue growth, and is continuing to make substantial progress on its three strategic outcomes: growing revenue, improving cash flow, and delivering innovation. It has delivered consistent operational results since Q1, achieving key milestones in advancing its portfolio, innovation, and productivity strategy. This growth is primarily driven by strength in international pet health, US farm animals, and additional contributions from new products.
Elanco Animal Health Incorporated (NYSE:ELAN) repaid $1.3 billion of debt in 2024 with improved cash flow and proceeds from the sale of its Aqua business. The company expects net leverage to be in the mid-4x level by the end of 2024. It holds a positive full-year outlook, with organic constant currency revenue growth expected to stand at 3%- 4% for the full year. Such initiatives position the company at a strategic level relative to its market position, giving it the ability to grow its business in key areas of strength.
3. Abercrombie & Fitch Co. (NYSE:ANF)
Market Cap: $7.15 billion
Forward P/E: 13.52
EPS Growth This Year: 64.80%
Number of Hedge Fund Holders: 48
Abercrombie & Fitch (NYSE:ANF) is a global, digitally-led omnichannel retailer offering personal care products, apparel, and accessories for women, men, and kids. It operates through a portfolio of brands, such as Abercrombie and Fitch, Abercrombie Kids, and Hollister brands, which include Hollister and Gilly Hicks.
The company operates throughout the Americas, APAC, and EMEA. The APAC segment operates in the Asia-Pacific region, including Oceania and Asia. The EMEA segment operates in Europe, the Middle East, and Africa. Abercrombie &Fitch (NYSE:ANF) operates 40 international franchise stores across its brands, primarily in the EMEA region and the Americas.
Q2 2024 marked the seventh consecutive quarter of net sales growth in an uncertain, dynamic consumer environment, showing the company’s strong financials. Its net sales grew by 21% in Q2, reaching $1.1 billion. The primary reasons behind this growth were expansion across regions, genders, and brands. Its agile supply chain and culture of financial discipline give it a competitive advantage, positioning it to deliver goals across various macro environments. To continue its positive trajectory, Abercrombie & Fitch (NYSE:ANF) is expanding its consumer base, developing across key categories, and delivering lifestyle assortments with growing relevance to local customers.
In addition, it plans to open new store locations, amplify its brand portfolio, refresh store experiences, and boost engagement by investing in incremental marketing. The improved marketing investment covers digital and social channels and real-life activations and experiences. Abercrombie & Fitch (NYSE:ANF) is also planning to reintroduce its Hollister brands, expanding its target audience in the process.
It delivered operating leverage in Q2, funding significant marketing, technology, digital, and people investments to strengthen its long-term goals. These efforts led to an operating income of $176 million for Q2, nearly double the results from Q2 2023.
Here’s what Chartwell Investment Partners, LLC said about Abercrombie & Fitch Co. (NYSE:ANF) in its third-quarter 2023 investor letter:
“Within the Carillon Chartwell Small Cap Growth Fund, information technology and industrials were the strongest-performing sectors, with strong stock selection leading to alpha generation. Abercrombie & Fitch Co. (NYSE:ANF) reported very strong earnings driven by significant margin improvement that resulted from much lower shipping and freight costs compared to last year.”
2. Permian Resources Corporation (NYSE:PR)
Market Cap: $9.55 billion
Forward P/E: 8.92
EPS Growth This Year: 13.70%
Number of Hedge Fund Holders: 51
Permian Resources (NYSE:PR) is an independent natural gas and oil company specializing in acquiring, optimizing, and developing oil and natural gas properties. Its assets and operations are concentrated in the Delaware Basin’s core and consist of more than 479,500 net leasehold acres and around 94,900 net royalty acres across the Permian Basin. A significant majority of the company’s assets are concentrated within the Delaware Basin in Eddy and Lea Counties, New Mexico, and Reeves and Ward Counties, Texas.
Permian Resources (NYSE:PR) delivered strong Q2 2024 results. Its revenue increased 100% year-over-year to $1.25 billion. Net income skyrocketed 220% to $235.1 million, while earnings per share (EPS) came in at $0.38, beating analyst estimates of $0.36 per share. These results were driven by improvements in operational efficiencies, which enabled the company to raise its full-year production guidance for the second consecutive quarter while maintaining other guidance ranges. The company also announced the acquisition of Barilla Draw from OXY, which adds significant high-return inventory in the core of Texas Delaware.
The company’s oil production also exceeded expectations, reaching 153,000 barrels of oil per day and total production of 339,000 barrels of oil equivalent per day. This strong performance was boosted by several factors, such as D&C efficiencies accelerating cycle times, consistent healthy performance, and strong run times in the field.
For instance, it averaged 1,500 drilled feet per day and more than 21 pumping hours per day in Q2. Both of these are company records for a quarter. The company is now raising its full-year oil guidance for the second consecutive quarter, amounting to 4,500 barrels of oil per day increase in total compared to its initial guidance in February. The increase in guidance is a direct result of the outperformance of the company’s base business. It is also increasing its 2024 TIL guidance by around 15 wells. This is driven by its strong D&C efficiencies, which drive a 13% cost improvement in second quarter as compared to 2023.
Permian Resources (NYSE:PR) also saw strong gas and NGL performance in Q2, driven primarily by an increase in gas processors, switching to ethane recovery because of the current Permian gas market. The company’s workover costs reduced significantly due to a reduction in cost per failure and low failure rates on downhole lift equipment, making Q2 one of its strongest quarters to date. It is continuing to optimize its recently acquired wells, quickly improving equipment and implementing its best practices to drive efficiencies.
1. Chord Energy Corporation (NASDAQ:CHRD)
Market Cap: $8.06 billion
Forward P/E: 6.94
EPS Growth This Year: 0.70%
Number of Hedge Fund Holders: 56
Chord Energy (NASDAQ:CHRD) is an independent production and exploration company specializing in acquiring, developing, and producing natural gas liquids (NGL), natural gas, and crude oil. Its operations are concentrated in the Montana and North Dakota areas of the Williston Basin, targeting the Three Forks and Middle Bakken formations. The company’s land position stretches across approximately 1.3 million net acres in the Williston Basin, which is around 98% of the region.
Chord Energy (NASDAQ:CHRD) has an average daily production of 287,000 net barrels of oil equivalent per day (Boepd). It sells its natural gas, NGL, and crude oil production to marketers, refiners, and other purchasers with access to nearly rail and pipeline facilities. The company’s Q2 2024 oil volumes stood at the top end of guidance, primarily due to less downtime and well performance.
It completed the acquisition of Enerplus on May 31, and the strategic and financial benefits of the transaction are giving the company an attractive appeal. Enerplus integration brings top-tier assets in the basin core to the company. Chord Energy (NASDAQ:CHRD) is attempting to increase returns on these assets by applying techniques it developed over the past years, including reducing downtime, optimizing spacing, and longer laterals. The combined asset base holds the potential to support strong returns, efficient operations, sustainable free cash flow, and a peer-leading return of the capital program. This positions the company to achieve the greater than $200 million synergies target, up from the original estimate of $150 million.
The company holds a competitive advantage due to the evolving nature of the Williston Basin, which has the highest oil cut and its footprint extending across almost the entirety of the play. The land and regulatory environment are additional benefits in the region, positioning Chord Energy (NASDAQ:CHRD) for greater growth and profitability.
Overall, CHRD ranks first among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of value stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CHRD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
