Cenovus Energy Inc. (CVE): One of the Best Affordable Stocks Under $40 According to Short Sellers

We recently compiled a list of the 10 Best Affordable Stocks Under $40 According to Short Sellers. In this article, we are going to take a look at where Cenovus Energy Inc. (NYSE:CVE) stands against the other affordable stocks under $40.

Several traders tend to profit from stocks through appreciation. However, some do the opposite– their idea is to profit from stocks when their value declines. This happens through a strategy known as short selling. In simple words, short selling means borrowing a security whose price is expected to fall and then selling it in an open market. Later, the trader buys that same stock back, hopefully at a lower price than initially sold for. The trader then returns the borrowed stock to the broker and pockets the difference.

Short interest serves as a barometer of investor sentiment towards a stock, sector, or market. Short interest represents the number of shares that have been sold short and are still outstanding. Since short sellers tend to benefit from the decline in the stock price, rising short interest generally signals higher negative investor sentiment. On the other hand, declining short interest means investors are becoming less bearish.

Short Sellers Made Fortunes Despite S&P 500 Touching Record Highs

Bloomberg reported that short sellers saw a strong 2Q 2024, despite the broader market touching record highs.

Over the past 6 months, the S&P 500 saw an increase of over ~11%. How did the short sellers make money in this environment? Short sellers amassed about $10 billion in paper profits during 2Q 2024.

The paper earnings from sectors like industrials, health care, and financials were able to offset the $15.7 billion mark-to-market losses experienced in technology.

This means that investors continue to flock to just a few mega-cap technology stocks amid a challenging macroeconomic backdrop. Therefore, there were some areas of weakness in other sectors. During the quarter ended 28 June, the tech-heavy Nasdaq 100 Index saw an increase of over ~7%. Meanwhile, the energy sector witnessed the most short covering during 2Q 2024.

Short Sellers Saw Record Weekly Profits Due to Broad-Based Tech Decline

While the short sellers saw losses in 2Q 2024 as a result of broad-based buying in the technology stocks, the group was able to pocket some gains in early April 2024. Reuters reported that traders who bet against the “Mag 7” group of the US technology stocks were able to book their biggest-ever weekly profit of over $10 billion in mid-April. During that time, the tech-heavy Nasdaq Composite Index and S&P 500 saw 6 straight sessions of declines as there was high inflation and evidence of resilience in the US economy. As a result, the rate cut hopes were hampered, benefiting the group of short sellers.

As per LSEG (London Stock Exchange Group plc) data, overall, Big Tech shed ~$1 trillion in their market cap.

Short Bets Have Now Declined, Large Bank Says

JPMorgan believes that consecutive highs in the broader US stock market turned short selling into a difficult trade. Therefore, the bets against the US indexes have now tumbled. The declining short interest continues to provide steady support to the US equities, helping to suppress volatility. Experts opine that there are 3 critical factors, because of which it was difficult to bet against the market situation.

Firstly, the short bets are expensive to maintain if the stock starts climbing, a risk that holds significance in today’s bull run. The excitement around artificial intelligence (Al), the potential for rate cuts, and the state of the broader economy have all been factored in. Secondly, analysts believe that regulators have added restrictions to short selling, as they have mandated transparency and added costs to short sellers that target equities. Finally, the industry players continue to back out as they face a rising wall of participating retail investors.

Our methodology

To compile the list of 10 Best Affordable Stocks Under $40 according to short sellers, we used the Finviz screener and shortlisted the stocks with prices less than $40. Then, we selected the stocks that have a forward P/E multiple of less than ~22.40x (since the broader market trades at a forward P/E of ~22.40x). Finally, we picked stocks that were the most popular among hedge funds and had low short interest. The stocks are ranked in descending order of their short interest.

At Insider Monkey, we are obsessed with 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).

A fleet of oil tankers at sea, representing the global reach of a crude oil supplier.

Cenovus Energy Inc. (NYSE:CVE)

Forward P/E Ratio as of 26 August: 9.02x

Share Price as of 26 August: $19.28

Number of Hedge Fund Holders: 46

Short % of Shares Outstanding (31 July 2024): 0.82%

Cenovus Energy Inc. (NYSE:CVE) is an integrated oil company, which is focused on creating value through the development of its oil sands assets.

Considering Cenovus Energy Inc. (NYSE:CVE)’s research ahead of its peers, resource potential to demonstrate the low-cost SAP technology, and project break-evens among the lowest in the oil sands industry, its SAP technology should give the company a cost advantage over its peers. Canadian oil industry should benefit from the TMX pipeline, which should help in reducing oil differentials and fuelling profitability. Cenovus Energy Inc. (NYSE:CVE) is committed to debt reduction and returning excess FCF to shareholders, providing attractive opportunities.

Cenovus Energy Inc. (NYSE:CVE) achieved a significant milestone by reaching its net debt target of $4 billion as of July. It posted strong 2Q 2024 results, with healthy performance from the oil sands assets and strong operating margins. Oil sands assets produced ~610,000 barrels per day with the $2.7 billion operating margin.

The company anticipates healthy performance in 4Q, primarily after the Christina turnaround completion. Moving forward, its earnings growth is expected to be supported by growth opportunities in the thermal heavy oil assets and favorable market dynamics in the Mid-Con refining market. Also, its focus on growth projects, refining business, and cost control should act as principal growth enablers.

In 2Q 2024, the company’s total revenues came in at ~$14.9 billion, up from $13.4 billion in the first quarter. This growth was mainly because of improved benchmark oil prices, including a narrower light-heavy crude oil differential, together with healthy operating results.

Four equities research analysts have given the stock a “Buy” rating. The average 12-month price target is $30.67.  A total of 46 out of 912 hedge funds tracked by Insider Monkey held stakes in Cenovus Energy Inc. (NYSE:CVE) as of the end of the second quarter.

L1 Capital, an investment management firm, released its first quarter 2024 investor letter. Here is what the fund said:

Cenovus Energy Inc. (NYSE:CVE) (Long +20%) shares performed strongly as the WTI oil price increased 16% to ~US$83/bbl, while refining margins in the U.S. Midwest improved dramatically from a low base. During March, Cenovus’s 2024 investor day was well received, where its 5-year outlook for the business included growth in upstream production of around 150m bbl/d above the current 800m bbl/d and a material turnaround of its downstream refining business. Over the next five years, the company expects to generate C$32b of cumulative free cash flow based on a US$75/bbl WTI oil price, a highly attractive prospect given its current market cap of ~C$51b. Furthermore, it has committed to return 100% of excess cash flow back to investors once it reaches its C$4b net debt target (expected in 2024). Cenovus’s strong cash flow generation, combined with the long-life nature of its oil sands assets and its low cost of production, make it one of our preferred Energy exposures.”

Overall CVE ranks 5th on our list of the best affordable stocks under $40 according to short sellers. While we acknowledge the potential of CVE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than CVE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.