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 Abercrombie & Fitch Co. (ANF) 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
Abercrombie & Fitch Co. (NYSE:ANF)
Market Cap: $7.15 billion
Forward P/E: 13.52
EPS Growth This Year: 64.80%
Number of Hedge Fund Holders: 48
Abercrombie & Fitch (NYSE:ANF) is a global, digitally-led omnichannel retailer offering personal care products, apparel, and accessories for women, men, and kids. It operates through a portfolio of brands, such as Abercrombie and Fitch, Abercrombie Kids, and Hollister brands, which include Hollister and Gilly Hicks.
The company operates throughout the Americas, APAC, and EMEA. The APAC segment operates in the Asia-Pacific region, including Oceania and Asia. The EMEA segment operates in Europe, the Middle East, and Africa. Abercrombie &Fitch (NYSE:ANF) operates 40 international franchise stores across its brands, primarily in the EMEA region and the Americas.
Q2 2024 marked the seventh consecutive quarter of net sales growth in an uncertain, dynamic consumer environment, showing the company’s strong financials. Its net sales grew by 21% in Q2, reaching $1.1 billion. The primary reasons behind this growth were expansion across regions, genders, and brands. Its agile supply chain and culture of financial discipline give it a competitive advantage, positioning it to deliver goals across various macro environments. To continue its positive trajectory, Abercrombie & Fitch (NYSE:ANF) is expanding its consumer base, developing across key categories, and delivering lifestyle assortments with growing relevance to local customers.
In addition, it plans to open new store locations, amplify its brand portfolio, refresh store experiences, and boost engagement by investing in incremental marketing. The improved marketing investment covers digital and social channels and real-life activations and experiences. Abercrombie & Fitch (NYSE:ANF) is also planning to reintroduce its Hollister brands, expanding its target audience in the process.
It delivered operating leverage in Q2, funding significant marketing, technology, digital, and people investments to strengthen its long-term goals. These efforts led to an operating income of $176 million for Q2, nearly double the results from Q2 2023.
Here’s what Chartwell Investment Partners, LLC said about Abercrombie & Fitch Co. (NYSE:ANF) in its third-quarter 2023 investor letter:
“Within the Carillon Chartwell Small Cap Growth Fund, information technology and industrials were the strongest-performing sectors, with strong stock selection leading to alpha generation. Abercrombie & Fitch Co. (NYSE:ANF) reported very strong earnings driven by significant margin improvement that resulted from much lower shipping and freight costs compared to last year.”
Overall, ANF ranks third among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of ANF 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 ANF 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.
