In this article, we will look at the 7 Best Small-Cap Value Stocks to Buy According to Hedge Funds. Let’s look at where Elanco Animal Health Incorporated (ELAN) stands against other small-cap value stocks.
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.
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
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.
Overall, ELAN ranks fourth among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of ELAN as an investment, 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 ELAN 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.