In this article, we discuss the 10 value stocks hedge funds love.
The economic climate in May 2022 presents a conundrum for the average investor. Inflation is near 40-year highs, and the Federal Reserve is raising interest rates to reign in spiraling prices. It raised its benchmark interest rate by half a percentage point on May 4, the largest hike since 2000. And minutes from the Fed’s meeting released on May 25 show that officials are willing to take an even more aggressive stance to tackle inflation, and move forward with multiple 50 basis points interest rate hikes, which is much higher than the market anticipates. Officials also believe the time may be near that policy will have to be changed from “Neutral”, where government policy does not restrict nor support growth, to “Restrictive”. These tightening measures, combined with plaguing supply chain, labor and geopolitical issues, have a particularly negative effect on growth stocks, with names such as Meta Platforms, Inc. (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL), and Alphabet Inc. (NASDAQ:GOOG) down 44%, 21.5%, and 25.5% in the year to date, respectively.
Investors need to keep an eye out for bargains, and chief global strategist at J.P. Morgan Asset Management, David Kelly says one should turn to value stocks. He noted in an interview on Monday that value stocks are currently trading at steep discounts to growth-oriented stocks. To drive home the point, Kelly said that the P/E (price-earnings) ratio on value stocks averaged 72% of that on growth stocks over the last 25 years. Presently, it is averaging 60%. Not only that, he sees some international companies also trading at relative discounts to US stocks, and thinks right now is a good opportunity to beef up your portfolio with solid, undervalued international companies.
Let’s now take a look at the 10 value stocks hedge funds love.
Our Methodology
We went through Insider Monkey’s database of 912 elite hedge funds that have been tracked as of the end of the first quarter of 2022. We picked 10 stocks with the highest number of hedge funds holding stakes in them, and with a P/E ratio of less than 20.
Hedge Funds Love These 10 Value Stocks
The Home Depot, Inc. (NYSE:HD) starts off our list of the 10 value stocks that hedge funds love. It is a US-based home improvement retailer which offers a range of decoration, outdoor, and home building products.
A detailed examination of the 900+ hedge funds tracked by Insider Monkey at the close of the first quarter showed that 75 hedge funds were long The Home Depot, Inc., with combined holdings worth $5.59 billion. This shows growing investor confidence in the company over the preceding quarter, where 68 hedge funds owned $6.08 billion worth of stakes in the company. Fisher Asset Management held a gigantic $2.43 billion stake in The Home Depot, Inc. at the close of the first quarter, making it the largest shareholder of the firm.
On May 20, Citi analyst Steven Zaccone maintained a ‘Buy’ rating on The Home Depot, Inc. shares, and raised the firm’s price target to $348 from $327. The analyst also raised his FY2022 earnings estimates after the company’s Q1 results came above expectations.
For the first quarter, The Home Depot, Inc. disclosed earnings per share of $4.09, beating forecasts by $0.40. The company’s revenue for the quarter was recorded at $38.9 billion, exceeding estimates by $1.27 billion.
Investment firm Ensemble Capital discussed many stocks in its Q1 2022 investor letter, and The Home Depot, Inc. was one of them. The fund said:
“Home Depot (7.7% weight in the Fund): The demand surge for remodeling and home improvement goods sparked by shelter in place orders, remote work going mainstream, and a shortage of homes on the market to buy, ran headlong into the supply chain crisis, triggering surging prices in the products Home Depot sells. But the company has been able to pass nearly all of these increased costs on to customers, with revenue growing 37% over the past two years while gross profits, or the profits the company makes on each item they sell, increased by 35%. Even this small difference appears to be due not to inflation eating away at Home Depot’s profits, but rather be a function of the huge increase in revenue the company has been generating in low margin lumber sales.”
Just like Meta Platforms, Inc., Apple Inc., and Alphabet Inc., The Home Depot, Inc. is on the radar of institutional investors.
9. General Motors Company (NYSE:GM)
Number of Hedge Fund Holders: 76
PE Ratio: 6.41
General Motors Company (NYSE:GM) stock was held by 76 hedge funds from the 912 strong database of Insider Monkey as of the end of Q1 2022, with a collective price tag of $5.5 billion. Its largest shareholder in the first quarter was Warren Buffett’s Berkshire Hathaway, with a $2.71 billion stake in the company.
The Detroit-based automaker was given an ‘Equal Weight’ rating by Morgan Stanley analyst Adam Jonas on May 13, who reduced the price target to $44 from $50. He cut growth and margin forecasts for General Motors due to the uncertainty in the economic environment, and sees rising interest rates and supply chain shortages as further headwinds.
General Motors Company posted its Q1 earnings on April 26, where EPS was reported at $2.09, beating estimates by $0.43. The revenue of roughly $36 billion for the quarter fell below Street forecasts by $1.22 billion.
Oakmark Funds, an investment firm, talked about General Motors Company in its Q1 2022 investor letter. Here’s what the fund said:
“General Motors was a detractor during the quarter, due to increased macro uncertainty, higher fuel prices, and concerns over rising input costs, which pressured the company in particular and the auto industry as a whole. While we are closely monitoring the potential impact of these dynamics, industry demand remains robust, driven by strong consumer balance sheets and pent-up demand after multiple years of constrained production. We also remain confident in GM’s ability to navigate a complex operating environment, which the company has consistently demonstrated over the past few years. Finally, the long-term picture remains bright. We believe GM is significantly undervalued, is well-positioned for the long-term transition to electric vehicles and has numerous needle-moving ancillary business opportunities (most notably Cruise, which is an industry leader in autonomous vehicle technology) that are underappreciated.”
8. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 79
PE Ratio: 12.23
Pfizer Inc. (NYSE:PFE) recorded $36 billion in sales from its Pfizer-BioNTech Covid-19 vaccine in 2021. It has grown its dividend yield for 12 years in a row, and offers a healthy yield of 2.98% as of May 25. Over the last 12 months, shares of Pfizer Inc. have recorded an uptick of 38%.
On May 4, Wells Fargo analyst Mohit Bansal reiterated an ‘Overweight’ rating on Pfizer Inc. shares and lowered the price target to $55 from $60. Pfizer Inc. and BioNTech (BNTX) recently received the FDA (Food and Drug Administration) emergency use authorization for its Covid booster vaccine meant for children aged 5 through 11.
For the first quarter, Pfizer Inc. disclosed earnings per share of $1.62, outperforming analysts’ forecasts by $0.05. Quarterly revenue stood at $25.7 billion, above consensus estimates by $927.1 million and signaling a jump of 76% in comparison to the year-ago quarter.
Of the 900+ elite hedge funds tracked by Insider Monkey, 79 reported ownership of positions in Pfizer Inc., with a collective price tag of $4.1 billion. The biopharmaceutical firm’s largest shareholder in the first quarter was AQR Capital Management, which held 10.7 million shares valued at $554 million.
ClearBridge Investments talked about Pfizer Inc. in its fourth quarter investor letter. Here’s what the fund said:
“While the level of general turnover abated as we progressed through 2021, it remained high in one area: post-COVID-19 recovery plays. The concept behind this investment thesis was, and still is, straightforward: with the advent of effective vaccines, the path from pandemic to endemic is just a matter of time. As this transition occurs, the estimated excess savings of over $2 trillion built up on U.S. consumer balance sheets will unlock dramatic pent-up demand for experiences, especially global travel. This investment case seemed especially compelling when the Pfizer vaccine positively surprised markets in November 2020. As a result, we made post-COVID-19 stocks (which were trading well below our estimate of recovery value) a sizable theme within the portfolio. We understood this to be a more aggressive tilt in positioning because it required a major improvement in demand to catalyze fundamentals and drive price toward higher business values. While we accepted that recovery would not be smooth and that it would take time to deploy vaccines both domestically and globally, we decided that recovery was the logical path of least resistance and we were being well compensated for these risks.
What we did not account for, however, was vaccine hesitancy and the risk of further infection waves. As a result, the first variant wave, Delta, was a negative surprise to both the market and our team. When the risk surfaced, we immediately updated our probability-driven models and debated how we should react. The resulting conclusion was that the recovery would be delayed and that we should reduce our exposure quickly, subsequently targeting the most aggressive recovery stocks such as cruise lines. We again acted swiftly and decisively to the positive surprise that Pfizer had delivered a high-efficacy antiviral COVID-19 pill. This pill should greatly reduce COVID-19 severity risks globally, increasing the probability of a global travel recovery in 2022. While this is still true, the emergence of the highly mutated Omicron variant set off another infection wave which spurred us to again act quickly and further reduce our risk exposure. This back-and-forth may sound exhausting, but it highlights our compulsion to act if we determine a surprise has a large enough impact on the probabilities that power our valuation-driven investment cases.
7. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Holders: 83
PE Ratio: 15.91
Exxon Mobil Corporation (NYSE:XOM) is an energy company based in the United States. It deals in the production of natural gas and crude oil products around the world. Hedge funds were seen piling into the company stock, given that rising energy prices create a lucrative investment opportunity. At the end of the first quarter, 83 hedge funds were long Exxon Mobil Corporation, up from 71 in the preceding quarter.
As of May 25, shares of Exxon Mobil Corporation have enjoyed an upwards march of 51.56% in the year to date, whilst the S&P500 has managed to shed 17.05% over the same period. Argus analyst Bill Selesky on May 9 kept a ‘Buy’ rating on the company shares, and upped the price target to $104 from $92. He sees Exxon Mobil Corporation benefiting from strong fundamentals in the energy market, and notes further upside potential amidst higher free cash flow and reduced capital spending.
For Q1, Exxon Mobil Corporation reported earnings per share of $2.07, missing consensus estimates by $0.16. The revenue over the quarter was recorded at $90.5 billion, up 53% year-on-year and outperforming estimates by $5.62 billion.
First Eagle Investment Management discussed the market position of Exxon Mobil Corporation in its Q2 2021 investor letter. The investment firm said:
“Leading contributors in the First Eagle Global Fund this quarter included Exxon Mobil Corporation. The continued recovery in oil prices as economies reopen helped fuel another strong performance across the energy complex, including shares of Exxon Mobil. Exxon Mobil recently lost a proxy fight with an activist investor that took three of the company’s 12 board seats. While the press was focused on the investor’s concerns over Exxon Mobil’s long term energy transformation strategy, other factors fundamental to shareholder returns—like capital discipline and balance sheet management—were also at play.”
6. Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Holders: 84
PE Ratio: 16.77
Merck & Co., Inc. is one of the largest biopharmaceutical firms in the world. It makes drug therapies for a range of diseases including oncology, immunology, neuroscience, and cardiovascular diseases, among others. The uncertainty in the current macro set-up is turning investors towards large-cap biopharmaceutical companies such as Merck & Co., Inc., which in particular boasts a large number of revenue-generating drugs as well as a solid pipeline for the future.
Barclays analyst Carter Gould on April 12 reiterated an ‘Overweight’ rating on Merck & Co., Inc. shares, and increased the price target to $97 from $94. Since the start of 2022, the company shares have registered a jump of 21.96% as of May 25.
Releasing its Q1 earnings report on April 28, Merck & Co., Inc. posted earnings per share of $2.14, which exceeded estimates by $0.31. Its revenue for the quarter increased 31.63% year-on-year, coming in at $15.9 billion and beating analysts’ forecasts by $1.25 billion.
Investors were cognizant of the stability a biopharma giant like Merck & Co., Inc. can bring to their portfolios in a volatile economic climate. 84 hedge funds were long on the company shares at the close of the first quarter, in comparison to 80 hedge funds a quarter earlier.
Here is what Miller Howard Investments, an investment firm, had to say about Merck & Co., Inc. in its Q3 2021 investor letter:
“While optimistic about a recovery, we continue to balance our cyclical holdings with dividend-payers in stable, less economically-sensitive industries. We hold three pharmaceutical companies, (which includes) Merck (MRK). All three have strong cash flows and balance sheets, making their high dividends reasonably safe. The investment controversy surrounding these pharma companies is whether they can develop or acquire new products to replace their current blockbuster drugs. The low valuations on these stocks reflects what we believe to be undue pessimism by investors on the prospects for new drugs.”
Along with Meta Platforms, Inc., Apple Inc., and Alphabet Inc., Merck & Co., Inc. is an exciting stock to watch in 2022.
5. Citigroup Inc. (NYSE:C)
Number of Hedge Fund Holders: 88
PE Ratio: 6.15
Citigroup Inc. (NYSE:C) is a financial services company based in New York. Oppenheimer analyst Chris Kotowski in early May noted that loan growth and rising interest rates present a good stimulus for the banking industry, and that investors should take advantage of the recent share price weakness. He kept an ‘Outperform’ rating on Citigroup Inc. shares and revised the price target to $93 from $100.
As of May 25, Citigroup Inc. offers its shareholders an impressive dividend yield of 3.87%. The company beat EPS estimates for the first quarter by $0.61. The revenue generated over Q1 2022 stood at $19.19 billon, above market estimates by $1.07 billion.
Out of the 912 hedge funds tracked by Insider Monkey at the close of the first quarter, Citigroup Inc. stock was held by 88 hedge funds with an aggregate value of $8.11 billion. Warren Buffett’s Berkshire Hathaway was by far the leading shareholder of Citigroup Inc. at the end of the first quarter, with a $2.94 billion stake consisting of more than 55 million shares.
Wells Fargo & Company is another financial services company that features on our list of value stocks that hedge funds love.
93 hedge funds from the database of Insider Monkey were stakeholders in Wells Fargo & Company at the close of the first quarter, with combined holdings worth $6.86 billion. Theleme Partners was the biggest shareholder of the company at the end of Q1 2022, with a stake worth roughly $885 million.
On April 18, Citi analyst Keith Horowitz reiterated a ‘Buy’ rating on Wells Fargo & Company with a $56 price target. He sees a buying opportunity owing to the recent share price weakness, and thinks the firm’s balance sheet remains very well positioned for higher interest rates.
For the quarter ending March, Wells Fargo & Company posted earnings per share of $0.88, exceeding estimates by $0.07. The company’s revenue over this period was $17.59 billion, which fell below analysts’ forecasts by $232.4 million.
Here is what Davis Funds had to say about Wells Fargo & Company in its Q4 2021 investor letter:
“The absolute level of revenues and profits generated by such companies is in fact so large that most of the major financial holdings in the portfolio produce enough annual operating income individually that a number of them could, in theory, purchase several entire businesses among hundreds of choices within the S&P 1500 Index, using just a year’s cash earnings without dipping into capital. This is theoretical, as financial companies would not be in the business of buying healthcare or technology companies, for example, but we point out these facts to illustrate the sheer scale of the economics produced by single financial companies in a given year, which is often a multiple of the cash earnings yielded by companies in a host of other industries.
Given this cash-generation power, we are naturally drawn to what we believe are strong and profitable financial institutions when the price is right. Presently, we believe the valuations of our financial holdings are not only reasonable, but extremely compelling, and our portfolio composition reflects this view. Representative financial holdings in the Fund include Wells Fargo.”
3. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 99
PE Ratio: 10.13
Bank of America Corporation (NYSE:BAC) is up next on our list of undervalued stocks that hedge funds love. It is a North Carolina-based bank holding company which offers a range of financial services to clients in the United States. It pays a sustainable dividend yield of 2.34% as of May 25, and boasts 8 consecutive years of dividend increases.
With a huge stake worth $41.6 billion, Warren Buffett’s Berkshire Hathaway was the leading shareholder of Bank of America Corporation shares at the end of March. In total, 99 hedge funds reported long bets on the company shares at the close of Q1 2022, as compared 84 in the preceding quarter.
On May 3, Oppenheimer analyst Chris Kotowski gave Bank of America Corporation an ‘Outperform’ rating and a price target of $50, down from $52. He stated that investors should benefit from the firm’s share price weakness, given that banks tend to do well amid rising interest rates and a growth in loans.
Bank of America Corporation recently announced its Q1 earnings, and earnings per share came in at $0.80, beating estimates by $0.06. The company raked in $23.23 billion in revenue for the quarter, also outperforming analysts’ forecasts by $135.8 million.
Investment firm Miller Value Partners talked about Bank of America Corporation in its Q1 2022 investor letter. Here’s what the fund said:
“There are many times when volatility and beta give false signals. Banks outperformed in the post-tech bubble bear market of the early 2000s. At the market peak prior to the financial crisis (when risk was the highest in those names!), Bank of America (NYSE:BAC) had a 0.9x beta (based on the trailing 5 years) suggesting its “risk” was below the market’s. Wrong! It massively underperformed in the financial crisis. Realized beta over the 5 years from the pre-crisis’ 2006 peak measured 2.3x.
A much better indicator of actual risk, both before and after the financial crisis, was the quality of the balance sheet and risk-taking appetite. Beta is backwards looking and non-stationary. Relying on it underestimated risk going into the financial crisis and overestimated coming out of it (its beta has continued to fall over the past decade).
We care greatly about risk. We spend a significant amount of time thinking about the risks to our investments. We measure risk as permanent impairment of capital, which means the prices and values don’t bounce back. Business fundamentals determine risk.”
2. Berkshire Hathaway Inc. (NYSE:BRK-B)
Number of Hedge Fund Holders: 104
PE Ratio: 8.29
Berkshire Hathaway Inc. (NYSE:BRK-B) is a US-based business conglomerate with holdings in food, retail, energy and transportation. It recently bought a $5.1 billion stake in energy firm Occidental Petroleum (NYSE:OXY), boosting its holdings in the high-flying energy sector.
104 hedge funds held $19.06 billion worth of positions in the company at the end of March, as compared to 108 hedge funds a quarter ago. Bill & Melinda Gates Foundation Trust held 28.68 million shares of Berkshire Hathaway Inc. worth $10.12 billion, making it the firm’s largest shareholder at the end of Q1 2022. The trust has received yearly donations of Berkshire stock from chairman Warren Buffett for many years.
Berkshire Hathaway Inc. disclosed earnings per share of $3.18 for the first quarter, above estimates by $0.31. Revenue stood at $70.8 billion for the quarter, also outperforming consensus figures by $1.66 billion.
1. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 110
PE Ratio: 9.32
JPMorgan Chase & Co. is a bank holding company based in the United States. It offers a range of financial services including asset management, loans, brokerage and market research.
On May 24, BMO Capital analyst James Fotheringham kept a ‘Market Perform’ rating on JPMorgan Chase & Co. shares and bumped the price target to $156 from $150. He thinks the company will be a long-term market share winner among global banks, but sees a number of headwinds offsetting the near-term benefits of growing credit demand and rising interest rates.
In the first quarter, JPMorgan Chase & Co. recorded revenue of $30.72 billion, outperforming estimates by $318.5 million. Earnings per share came in below estimates by $0.08.
A total of 110 hedge funds were bullish on JPMorgan Chase & Co. at the close of Q1 2022, with combined holdings worth $5.05 billion. This shows growing investor confidence in the company over the previous quarter, where 107 hedge funds owned positions in the firm. Fisher Asset Management, with 7.76 million shares valued at $1.05 billion, was the largest shareholder of JPMorgan Chase & Co. at the end of Q1 2022.
Investment firm ClearBridge Investments highlighted a few stocks in its Q4 2021 investor letter, and JPMorgan Chase & Co. was one of them. Here’s what the fund said:
“Our energy and financials holdings kept pace in the 2021 rally. In financials, JPMorgan benefited from strong economic growth, a rise in Treasury yields, and a benign credit environment.”
You can also take a look at 10 Blue Chip Dividend Stocks Hedge Funds Are Buying and 10 Best Real Estate Stocks To Buy Now.
