Five Under-$10 Stocks to Buy Now

Given the upside potential many lower-priced stocks have, Insider Monkey has put together a list of the smart money’s favorite stocks trading for under $10 per share. Although no stock is guaranteed to outperform the market, all of the stocks in this list are held by a substantial number of the hedge funds in our database, who count the best and brightest financial and analytical minds as employees. In the long run, the best and brightest tend to win out against the uninformed.

Without further ado, let’s take a closer look at the developments and prospects concerning the smart money’s five favorite companies trading for under $10 right now, which are Rite Aid Corporation (NYSE:RAD), Office Depot Inc (NASDAQ:ODP), MGIC Investment Corp. (NYSE:MTG), Regions Financial Corp (NYSE:RF), and Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR). We’ll also use the latest SEC regulatory filings to determine how successful hedge funds traded these stocks in the second quarter.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

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#5 Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)

– Number of Hedge Fund Shareholders (as of June 30): 23
– Total Value of Hedge Funds’ Holdings (as of June 30): $537.56 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 1.20%

Although the number of funds in our system long Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) remained the same quarter-over-quarter at 23 as of June 30, Petrobras shares have been on a tear. Shares of the Brazilian oil company are now up by 122% year-to-date and up by more than 300% from their February lows. Petrobras’ rally is due to a combination of two things; first crude prices are higher than where they were in February, and investors are optimistic that Russia and OPEC countries might strike a ‘freeze’ agreement later this month in Algeria. Second, the Brazilian government has given Petrobras more economic freedom in terms of pricing and investors are buying into the success of Petrobras’ cost cutting initiatives. Both things mean higher returns over time.

#4 Regions Financial Corp (NYSE:RF)

– Number of Hedge Fund Shareholders (as of June 30): 39
– Total Value of Hedge Funds’ Holdings (as of June 30): $712.73 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 6.60%

The bull case for Regions Financial Corp (NYSE:RF) is that it will benefit if interest rates rise. As is the case for other regional banks, Regions Financial’s net interest margin will likely widen if interest rates normalize. Wider net interest margins generally translate to higher returns on capital and more profit. Given that Federal Reserve Chair Janet Yellen recently said that the case for rate hikes has strengthened, the case for a more profitable Regions Financial has also improved. Investors have taken notice, as shares of the stock are up by almost 5% year-to-date.

We’ll reveal three more cheap stocks on the next page that hedge funds love.

#3 MGIC Investment Corp. (NYSE:MTG)

– Number of Hedge Fund Shareholders (as of June 30): 46
– Total Value of Hedge Funds’ Holdings (as of June 30): $616.07 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 30.40%

In terms of peer valuation, MGIC Investment Corp. (NYSE:MTG) is attractive. When American International Group Inc (NYSE:AIG) sold its mortgage insurance business on August 16, for example, it received a 9.5-times 2015 EPS multiple for the division. If the same multiple were applied to MGIC, the company’s stock would be around 30% higher. Many hedge funds have taken notice. 46 funds that we track were long MGIC Investment Corp. (NYSE:MTG) at the end of the second quarter, up nby nine funds from the end of the March quarter. If industry pricing improves or the sector consolidates further, look for MGIC’s valuation to potentially rise.

#2 Office Depot Inc (NASDAQ:ODP)

– Number of Hedge Fund Shareholders (as of June 30): 47
– Total Value of Hedge Funds’ Holdings (as of June 30): $296.88 million
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 16.30%

Although its same-store sales are weak, it is hard not to own Office Depot Inc (NASDAQ:ODP) given the stock’s value. After a botched merger attempt, Office Depot’s management has promised to focus on unlocking synergies from its merger with OfficeMax, which is expected to amount to around $750 million in annual savings by the end of 2017. The company also expects to save an incremental $250 million in annual costs through various efforts, including shuttering an additional 300 stores over the next few years. If Office Depot’s management can deliver, its stock has substantial upside from its currently depressed levels. 47 funds owned shares of Office Depot Inc (NASDAQ:ODP) at the end of the second quarter, down by 11 funds quarter-over-quarter.

#1 Rite Aid Corporation (NYSE:RAD)

– Number of Hedge Fund Shareholders (as of June 30): 50
– Total Value of Hedge Funds’ Holdings (as of June 30): $1.25 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 15.90%

With 50 hedge funds in our database long the stock at the end of June, Rite Aid Corporation (NYSE:RAD) is the top under-$10 stock among the smart money set. Unlike the bull case for other stocks, many funds who own Rite Aid are long for arbitrage reasons. In October of 2015, Walgreens Boots Alliance Inc (NASDAQ:WBA) agreed to buy Rite Aid for $9 in cash per share in a deal that was expected to close in the second half of 2016. Rite Aid’s substantial discount to the deal terms shows that some funds don’t think the FTC will give its blessing to the merger. If the deal goes through, Rite Aid has 18% upside.

Disclosure: None