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 Permian Resources Corporation (PR) 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
Permian Resources Corporation (NYSE:PR)
Market Cap: $9.55 billion
Forward P/E: 8.92
EPS Growth This Year: 13.70%
Number of Hedge Fund Holders: 51
Permian Resources (NYSE:PR) is an independent natural gas and oil company specializing in acquiring, optimizing, and developing oil and natural gas properties. Its assets and operations are concentrated in the Delaware Basin’s core and consist of more than 479,500 net leasehold acres and around 94,900 net royalty acres across the Permian Basin. A significant majority of the company’s assets are concentrated within the Delaware Basin in Eddy and Lea Counties, New Mexico, and Reeves and Ward Counties, Texas.
Permian Resources (NYSE:PR) delivered strong Q2 2024 results. Its revenue increased 100% year-over-year to $1.25 billion. Net income skyrocketed 220% to $235.1 million, while earnings per share (EPS) came in at $0.38, beating analyst estimates of $0.36 per share. These results were driven by improvements in operational efficiencies, which enabled the company to raise its full-year production guidance for the second consecutive quarter while maintaining other guidance ranges. The company also announced the acquisition of Barilla Draw from OXY, which adds significant high-return inventory in the core of Texas Delaware.
The company’s oil production also exceeded expectations, reaching 153,000 barrels of oil per day and total production of 339,000 barrels of oil equivalent per day. This strong performance was boosted by several factors, such as D&C efficiencies accelerating cycle times, consistent healthy performance, and strong run times in the field.
For instance, it averaged 1,500 drilled feet per day and more than 21 pumping hours per day in Q2. Both of these are company records for a quarter. The company is now raising its full-year oil guidance for the second consecutive quarter, amounting to 4,500 barrels of oil per day increase in total compared to its initial guidance in February. The increase in guidance is a direct result of the outperformance of the company’s base business. It is also increasing its 2024 TIL guidance by around 15 wells. This is driven by its strong D&C efficiencies, which drive a 13% cost improvement in second quarter as compared to 2023.
Permian Resources (NYSE:PR) also saw strong gas and NGL performance in Q2, driven primarily by an increase in gas processors, switching to ethane recovery because of the current Permian gas market. The company’s workover costs reduced significantly due to a reduction in cost per failure and low failure rates on downhole lift equipment, making Q2 one of its strongest quarters to date. It is continuing to optimize its recently acquired wells, quickly improving equipment and implementing its best practices to drive efficiencies.
Overall, PR ranks second among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of PR 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 PR 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.
