In this article, we’re going to talk about the 7 cheap hot stocks to invest in now.
Value Opportunities
Small-cap stocks seem to be set for growth, driven by anticipated rate cuts and strategic stock-picking opportunities. Analysts have noted that these stocks still remain undervalued compared to larger counterparts, and continued rate cuts and confidence in a soft landing for the economy could enhance their performance. In easier words, the outlook for small-cap stocks remains bullish amid changing economic conditions and anticipated monetary policy shifts. Investors are encouraged to focus on strategic stock selection to capitalize on potential earnings growth in this sector as market dynamics evolve. Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, talked about this earlier in an interview on CNBC, expressing that she expects small-cap stocks to grow further. We covered this discussion in our article on the 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts, here’s an excerpt from it:
“Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts… Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.”
But small-caps aren’t the only undervalued sector right now, as GLOBALT Investments senior portfolio manager, Keith Buchanan, mentioned on Wealth! at Yahoo Finance, on October 7. In a recent market update, stocks were slipping as traders digested a hotter-than-expected Consumer Price Index report. With over 90 minutes into the trading day, investors were looking for the next big catalyst, which many believe will come from the upcoming earnings season. To discuss these themes, Keith Buchanon noted that while the excitement around AI seems to be waning, there are still significant opportunities in other sectors.
Buchanon pointed out that earnings expectations have shifted from mid-single digits to mid-double digits for the upcoming year. He emphasized that the fourth quarter is expected to mark a transition from lower healthy growth to more robust growth. This change is not solely due to AI but also reflects broader revenue growth across various sectors, including industrials and energy. He expressed enthusiasm about the potential for earnings growth to stabilize as it expands beyond traditional sectors like technology and consumer services.
When asked about specific sectors to watch as 2024 approaches, Buchanon indicated a shift in focus from AI-centric stocks to more traditional value spaces. He mentioned financials as one sector already benefiting from increased investor interest. Additionally, he highlighted industrials and consumer discretionary sectors as areas that have been overlooked and offer attractive valuations compared to the broader S&P 500.
Buchanon also reflected on the broader market context, noting that the S&P 500 had gained 34.4% over the past 12 months ending in September 2024. Despite various geopolitical tensions, including elections and conflicts around the world, he emphasized that these events are factored into their investment strategies. He drew parallels between current geopolitical risks and those seen in 2021 when inflation became a pressing concern following Russia’s invasion of Ukraine.
He acknowledged that while they do not make trades based solely on election outcomes, they consider all incoming information that could impact economic consensus when advising clients. Buchanon’s approach emphasizes a long-term perspective in navigating current market volatility and positioning portfolios for future growth.
Buchanon’s opinion helps investors prepare for earnings season and consider opportunities beyond the AI narrative that has dominated discussions over the past couple of years. With a focus on value sectors and a broadening investment strategy, he is positioning for potential growth as we head into 2025. To help you diversify your portfolio in line with Buchanon, we’re here with a list of the 7 cheap hot stocks to invest in now.
Methodology
We used Finviz to compile an initial list of the top stocks with a year-to-date performance of over 30%. Then we narrowed down to 25 stocks that had a forward price-to-earnings ratio under 15. We then selected the 7 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).
7 Cheap Hot Stocks To Invest In Now
7. Renaissancere Holdings Ltd. (NYSE:RNR)
Year-to-Date Performance as of October 11: 42.24%
Forward Price-to-Earnings Ratio: 7.75
Number of Hedge Fund Holders: 30
Renaissancere Holdings Ltd. (NYSE:RNR) provides reinsurance and insurance products globally, operating through Property, Casualty, and Specialty segments. It provides excess loss reinsurance for natural catastrophes, as well as other property and casualty coverages, distributing products and services primarily through intermediaries. Over the preceding year, the demand for property catastrophe reinsurance limits in the US excluding cat bonds increased by ~$20 billion.
Q2 2024 results were driven by strong underwriting performance across all major lines of business. The company generated $2.84 billion in revenue, up 29.27% year-over-year. The operating income reached $651 million, with an annualized operating return on average common equity of 28%. All three drivers of profit, underwriting, fee income, and investment income, contributed significantly.
Underwriting income increased 37% from strong growth in premiums. Retained net investment income rose 50% driven by higher interest rates and a larger asset base. The earnings increased 40% to $12.41 per share.
The company is well-positioned for continued success. The property catastrophe reinsurance market remains favorable, with strong demand and pricing. The Capital Partners business is thriving, attracting capital and providing valuable services to customers. The successful integration of Validus Re has strengthened its market position and enhanced its underwriting capabilities.
As Renaissancere Holdings Ltd. (NYSE:RNR) has strategically shaped its risk portfolio to reduce exposure to smaller events while maintaining attractive returns, the company is positioned to deliver value to its shareholders.
TimesSquare Capital U.S. Focus Growth Strategy stated the following regarding RenaissanceRe Holdings Ltd. (NYSE:RNR) in its first quarter 2024 investor letter:
“Earnings for RenaissanceRe Holdings outstripped expectations as RenaissanceRe Holdings Ltd. (NYSE:RNR) showed better rates of underwriting, higher fee income, and increased investment income—all of which also exceeded levels of industry peers. Pricing also appeared to remain strong for this year and into 2025, and the result lifted RenRe’s shares by 20%.”
6. Enova International Inc. (NYSE:ENVA)
Year-to-Date Performance as of October 11: 51.90%
Forward Price-to-Earnings Ratio: 8.33
Number of Hedge Fund Holders: 31
Enova International Inc. (NYSE:ENVA) is a financial services company that offers loans and financing services through analytics and machine learning algorithms with online lending that serves small businesses and consumers who are underserved by traditional banks, using advanced technology and data analytics to assess creditworthiness and make lending decisions.
The company’s revenue was up 25.83% in the second quarter of 2024, generating a total of $628.44 million while earning $2.21 per share. Originations in this quarter grew 27% year-over-year, led by strong demand in both small business and consumer lending, combined with solid credit performance.
As a result, combined loan and finance receivables increased 25% year-over-year. Small business products accounted for 64% of the portfolio, while consumer products represented 36%. Small business revenue increased 32% year-over-year and consumer revenue increased 22%. Diversified product offerings and efficient marketing continue to drive growth. The deep experience, diversified portfolio, and disciplined approach to risk management have been key to the company’s success.
The company can deliver sustainable and profitable long-term growth, driven by its effective strategy, products, machine learning capabilities, and strong balance sheet. While it remains mindful of potential macroeconomic changes, the balanced approach to growth and risk management positions Enova International Inc. (NYSE:ENVA) to navigate challenges and continue its success.
Blue Tower Asset Management made the following comment about Enova International, Inc. (NYSE:ENVA) in its Q3 2023 investor letter:
“The moat of these tech companies then is not their code but their proprietary data built up over decades, the scale and infrastructure investment of their data centers, and their distribution ability for any resulting AI products or services. This dynamic means that the main winners of the new generative AI boom will be the incumbent tech giants.
Other potential winners will be companies with large propriety datasets that are unique within their industry. For example, I do not believe that there are any companies in the US with as large of a dataset of the borrowing behavior of short-term, subprime borrowers as Enova International, Inc. (NYSE:ENVA), a portfolio holding of our firm. Companies that fail to take advantage of newly developing AI tools will be at a great disadvantage to their competitors who do.”
5. Phinia Inc. (NYSE:PHIN)
Year-to-Date Performance as of October 11: 47.90%
Forward Price-to-Earnings Ratio: 9.52
Number of Hedge Fund Holders: 35
Phinia Inc. (NYSE:PHIN) is a leading provider of advanced components and systems for combustion and hybrid propulsion, providing solutions that optimize performance, increase efficiency, and reduce emissions in commercial, light, and industrial vehicles. It offers fuel injection systems and aftermarket products, serving customers like original equipment manufacturers and various industries.
In the second quarter of 2024, the company generated $868 million in revenue, slightly below market expectations, due to increased standalone company costs, foreign exchange losses, and lower sales. Still, the aftermarket business remained resilient, particularly in Europe. The Fuel Systems segment faced challenges due to weaker-than-expected commercial vehicle sales in Europe and lower light vehicle sales in China. Margins remained strong in both Aftermarket and Fuel Systems, at 15.1% and 10.1%, respectively.
On September 12, it introduced a new electronically controlled common rail injection system for small off-highway diesel engines. This innovative technology helps reduce emissions and improve fuel efficiency, supporting customers in meeting regulatory standards. The system is designed for use with Kohler Engines and is compatible with various off-highway applications.
The global commercial and light vehicle markets are experiencing a slight downturn, partially offset by slower growth in EVs. Despite this softening, internal combustion engines remain crucial for achieving carbon neutrality. Phinia Inc. (NYSE:PHIN) is proactively investing in alternative fuel solutions such as ethanol, biofuels, e-fuels, and hydrogen. The strategic focus on improving internal combustion engine efficiency, coupled with its diversification into commercial vehicles and aftermarket segments, positions the company well for long-term growth.
Ariel Focus Fund stated the following regarding PHINIA Inc. (NYSE:PHIN) in its first quarter 2024 investor letter:
“Manufacturer of premium fuel and electrical systems, Phinia Inc. (PHIN) also traded up in the period on solid earnings results and a positive full year 2024 outlook. Healthy consumer pricing, new business wins across all end markets, ongoing weakness in electric vehicles, growth in light vehicle original equipment and strong cost controls, more than offset disappointing commercial vehicle sales in China. Meanwhile, management continues to prioritize capital returns to shareholders via buybacks and dividends. Looking ahead, we expect PHIN to deliver sustainable, profitable growth and significant cash generation as it captures operational efficiencies, exits agreements with its former parent company BorgWarner Inc. and also expands its industrial and aftermarket customer base.”
4. Vista Outdoor Inc. (NYSE:VSTO)
Year-to-Date Performance as of October 11: 49.10%
Forward Price-to-Earnings Ratio: 10.88
Number of Hedge Fund Holders: 36
Vista Outdoor Inc. (NYSE:VSTO) is a designer, manufacturer, and marketer of outdoor sports and recreation products, operating in two markets: shooting sports and outdoor products. It has over 40 labels and subsidiaries, manufacturing and distributing products for hunting, shooting, fishing, camping, and other outdoor activities. Some of its well-known brands include Federal Ammunition, Remington Arms, Savage Arms, and Bushnell Optics.
The company reported a revenue decline as it entered the first quarter of fiscal 2025, down by 7.09%, accounting for $644.18 million in quarterly revenue. The company’s earnings per share also declined by 6.5% to $1.01. The Kinetic Group generated $370 million in revenue, while Revelyst reported $274 million. The company faced challenges with supply chain disruptions, delayed product launches, and increased manufacturing costs.
However, the GEAR Up program at Revelyst has already saved up around $5 million this year, putting the company on track to achieve its target savings of $25-30 million for the fiscal year 2025. Additionally, its products continue to be recognized, as evidenced by a recent $3.6 million contract with the US military for its 7.62×51 Long Range ammunition.
On October 5, Revelyst entered into an agreement with Strategic Value Partners (SVP) to be acquired for $1.125 billion. The transaction is expected to close by January 2025, subject to certain conditions. SVP’s investment will provide Revelyst with additional resources and support to accelerate its growth and innovation. The partnership aims to leverage Revelyst’s strong market presence and expertise to expand its reach and profitability.
Vista Outdoor Inc. (NYSE:VSTO) remains laser-focused on driving growth and market share gains with category-defining brands and innovative offerings. Upcoming and continuing product launches further solidify its position as a leader in outdoor gear and technology.
ClearBridge Small Cap Value Strategy stated the following regarding Vista Outdoor Inc. (NYSE:VSTO) in its fourth quarter 2023 investor letter:
“Stock selection in the consumer discretionary sector also weighed on performance during the quarter. Outdoor sports and recreation product manufacturer Vista Outdoor Inc. (NYSE:VSTO) sold off after the company announced its deal to sell its sporting products business for lower than what the market anticipated. We believe the final price is heavily discounted to the intrinsic value of the business and ultimately elected to exit the position in order to consolidate our exposure in higher-conviction holdings.”
3. Mr Cooper Group Inc. (NASDAQ:COOP)
Year-to-Date Performance as of October 11: 44.98%
Forward Price-to-Earnings Ratio: 8.06
Number of Hedge Fund Holders: 37
Mr Cooper Group Inc. (NASDAQ:COOP) is a leading provider of mortgage servicing and origination services in the US, offering a range of mortgage solutions, including loan servicing, loan origination, and default servicing. It has a strong focus on customer service and technology, aiming to streamline the mortgage process and provide exceptional experiences to borrowers.
The company exceeded expectations in the second quarter of 2024, reporting earnings per share of $2.52. Revenue for the quarter reached $583 million, representing a 19.96% increase from a year-ago period. The servicing revenue surged by 37% year-over-year, supported by a record-low delinquency rate of just 1%. This combination of efficient operations, a robust servicing portfolio, and a strong financial position places them in a prime position to capitalize on future growth opportunities within the mortgage servicing sector.
The strategic acquisition of Flagstar’s mortgage operations for $1.4 billion significantly bolstered the company’s servicing business. This deal expanded its servicing portfolio to $1.2 trillion, adding $1.2 billion in mortgage servicing rights. The growing sub-servicing mix, now at 52% of the portfolio, strengthens its market position.
Just recently on October 9, it announced several senior leadership updates to further its digital-first strategy and leverage AI. The leadership changes aim to enhance the company’s technology capabilities and provide a more seamless customer experience.
Mr Cooper Group Inc. (NASDAQ:COOP) is committed to shareholder value by actively repurchasing shares, with a 4% reduction in outstanding shares over the past year and an additional $200 million allocated for future buybacks. As the housing market evolves and interest rates fluctuate, its adaptability and proactive approach will remain crucial for sustaining its leadership in the industry.
Diamond Hill Select Strategy stated the following regarding Mr. Cooper Group Inc. (NASDAQ:COOP) in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon, Texas Instruments and Mr. Cooper Group Inc. (NASDAQ:COOP). Mortgage-servicing company Mr. Cooper Group is benefiting from a high interest-rate environment, which is supporting increased profitability in the mortgage-servicing business.”
2. Crocs Inc. (NASDAQ:CROX)
Year-to-Date Performance as of October 11: 45.92%
Forward Price-to-Earnings Ratio: 9.98
Number of Hedge Fund Holders: 40
Crocs Inc. (NASDAQ:CROX) is a global footwear company, operating in over 80 countries, known for its iconic, comfortable, and colorful clogs. It offers a range of footwear for men, women, and children, including casual shoes, sandals, and boots. Unique design and comfortable fit have made it a popular choice for people of all ages, and it continues to innovate and expand its product line.
This company heavily invests in collaborations and is actively evolving its partnership model to strengthen consumer engagement and brand popularity. In Q2 2024, it celebrated SpongeBob’s 25th anniversary with a limited-edition clog release at the Las Vegas Sphere. It’s pursuing sneaker and lifestyle opportunities, as demonstrated by the highly successful launch of the Salehe Juniper sneaker.
In the second quarter of 2024, it made $4.01 per share. The revenue was up 3.65% from a year-ago period, accounting for $1.11 billion. The company is focused on three key strategies: boosting brand awareness and global appeal, investing in talent to increase market share, and expanding its product offerings to attract new customers.
It experienced strong growth in the Tier 1 markets. In North America, it outperformed expectations with a 3% revenue increase, driven by strong D2C sales and increased demand from retailers. Internationally, revenue grew by 22%, with China and Australia showing significant growth. China’s growth was particularly impressive, reaching ~70% on top of last year’s triple-digit growth.
The company is celebrating its annual Croctober festivities by bringing some of its most requested fan creations to life. New products include Pet Crocs, Classic Lined Clogs, and a life-sized Crocs Costume, as announced on October 9. Crocs Inc.’s (NASDAQ:CROX) strong fundamentals and strategic initiatives have positioned it as a promising stock.
Silver Beech Capital stated the following regarding Crocs, Inc. (NASDAQ:CROX) in its first quarter 2024 investor letter:
“In October 2023, we invested in Crocs, Inc. (NASDAQ:CROX), the manufacturer/retailer of iconic foam casual footwear, at an attractive mid-teens FCF yield. Crocs is a well-managed, capital light, high margin, growing consumer-favorite brand.
We believe a combination of cognitive and institutional biases prevented the market from correctly evaluating the company, including anchoring sales expectations to the company’s pre-pandemic sales volume, overextrapolating sales slowdowns at the company’s relatively small HeyDude subsidiary, and focusing on questionable short-term oriented alternative data. The market misunderstood (and perhaps still does) the company’s growth profile, earnings quality, and earnings power. In the year ahead, we forecasted there was a straightforward path to Crocs posting strong near-term topline and FCF growth while deleveraging.
After a few months, the market agreed with us that Crocs was simply too cheap and quickly rerated the company. The Fund does not own a stake in Crocs today. The Fund’s investment in Crocs generated a 248% gross IRR / 40% total gross return over our 4-month investment period.”
1. United Airlines Holdings Inc. (NASDAQ:UAL)
Year-to-Date Performance as of October 11: 45.73%
Forward Price-to-Earnings Ratio: 5.01
Number of Hedge Fund Holders: 56
United Airlines Holdings Inc. (NASDAQ:UAL) is one of the largest airline carriers in the US, offering a range of domestic and international flights, serving destinations across North America, Europe, Asia, and other parts of the world. It is known for its extensive network, frequent flyer program, and commitment to customer satisfaction.
It partnered with SpaceX to provide high-speed Starlink Wi-Fi on its aircraft. This groundbreaking agreement, the largest of its kind in the aviation industry, will offer passengers free, fast, and reliable internet connectivity. With plans to equip over 1,000 aircraft with Starlink, the company is poised to revolutionize inflight internet access. Passengers can expect to enjoy live TV, streaming, social media, shopping, and gaming during their flights. Testing is scheduled to begin in early 2025, with the first passenger flights featuring Starlink service later that year.
The company transported a record-breaking 44.4 million passengers in Q2 2024. It also set a daily record by serving 565,000 travelers. Additionally, its international capacity surpassed its closest US competitor by 35%. The overall revenue generated in this quarter was $14.99 billion, up 5.70% year-over-year. The earnings per share value was $4.14. Revenue from key markets among frequent business travelers grew by 11%, while total passenger revenue increased by 5%. Premium revenues rose by 8.5%, driven by strong demand for premium seats.
It’s expanding its international network for next summer with 8 new destinations. United Airlines Holdings Inc. (NASDAQ:UAL) remains on track for further growth in its industry. The company’s focus on safety, operational efficiency, and customer satisfaction positions it for continued success.
ClearBridge Value Equity Strategy stated the following regarding United Airlines Holdings, Inc. (NASDAQ:UAL) in its fourth quarter 2023 investor letter:
“Our industrials stocks faced headwinds early in the quarter due to fears of a recession, which weighed on some of our more cyclical industrials such as United Airlines Holdings, Inc. (NASDAQ:UAL). Additionally, the Fed’s pivot and the prospect of rate cuts in 2024 helped fuel a rally in lower-quality industrials that we did not hold, further dampening the performance of our high-quality holdings.”
While we acknowledge the growth potential of United Airlines Holdings Inc. (NASDAQ:UAL), 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 UAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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