We recently compiled a list of the 12 Oversold Value Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Regal Rexnord Corporation (NYSE:RRX) stands against the other oversold value stocks.
Value stocks, as defined by their low forward P/E ratio, can present compelling investment opportunities, especially when they’ve become oversold due to negative market sentiment or temporary economic uncertainties. An oversold condition typically signals that investors have overreacted to negative events and recent challenges, driving stock prices below their fundamental intrinsic value. This discrepancy creates an attractive entry point for discerning investors who recognize that such pessimism is often short-lived. As investor sentiment stabilizes and market perceptions realign with underlying fundamentals, these undervalued stocks can experience significant rebounds, delivering strong returns. As legendary value investor Warren Buffett famously advised, “Be fearful when others are greedy, and greedy when others are fearful.”
READ ALSO: 11 Oversold Blue Chip Stocks to Buy According to Hedge Funds
Until recently, however, it was challenging for investors to identify genuinely oversold value opportunities. The entire US stock market was trading near record-high valuations, with the forward P/E ratio almost reaching 24x in late 2024 – significantly above the historical average of around 16x. Under such conditions, most stocks appeared expensive, limiting the potential to find attractive entry points for value-driven investors. The recent market correction, however, has markedly improved this situation. As market indices have retreated into correction territory, valuations have dropped by approximately 10% as well. The new dilemma, however, is to identify whether the current correction has ended or the markets will continue to go lower.
The reputable Yardeni Research boutique believes that the current market selloff is entirely attributable to the Trump 2.0 tariff turmoil. Here’s what they said in a recent email dispatch:
“The bulls still believe (hope) that President Donald Trump is using tariffs as a bargaining tool to negotiate lower tariffs with America’s major trading partners. Some of them predict that if that’s not the case, then Trump will back off in response to political pressure to do so from lots of constituencies that stand to be harmed by a trade war. He might also back off if the stock market continues to tank. The bears warn that by the time Trump ever would relent, the economy would be in a consumer-led recession and the stock market surely would be in a bear market.”
We tend to agree with this reasoning and believe that the new US administration is unlikely to push too hard on tariffs and other policies that are likely to hit the markets too hard and hurt not only individual investors but also the business partners and institutions that supported the Presidential race. Furthermore, a widespread economic recession and a bearish stock market are certainly going to make the new US administration lose political points, something which is strongly undesirable for the prospect of being re-elected in 2028.
With that being said, the current 21x forward P/E valuation for the stock market is the cheapest in more than a year and may be approaching a local bottom. Furthermore, many industries have already been hit hard by Trump 2.0 policies and are trading at or near their 52-week lows. The key takeaway for readers is that we are at an opportunistic moment to look for oversold value stocks to buy.
A technician inspecting a specialized industrial machinery in an engineering lab.
Our Methodology
To find oversold value stocks we used Finviz to screen for stocks with a forward P/E under 15 which are down at least -30% in the last year and display a Relative Strength Index (RSI) below 40. Then we compared the list with our proprietary Q4 2024 database of hedge funds’ ownership and included in the article the top 12 stocks with the largest number of hedge funds that own the stock.
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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Regal Rexnord Corporation (NYSE:RRX)
Number of Hedge Fund Holders: 34
Regal Rexnord Corporation (NYSE:RRX) is a global manufacturer of electric motors, bearings, power transmission components, and industrial automation solutions. The company operates through four segments: Motion Control Solutions, Climate Solutions, Commercial Systems, and Industrial Systems. Its products are used in a wide range of applications, including HVAC systems, industrial machinery, food and beverage processing, renewable energy, and automation. RRX serves OEMs, system integrators, and end users across diversified industrial and commercial markets.
Regal Rexnord Corporation (NYSE:RRX) has undergone a significant transformation since 2019, evolving from a $3.6 billion business to a $6 billion enterprise with improved margins and portfolio mix. The company has achieved substantial margin improvements, with gross margins increasing by 1,100 basis points to 38% and EBITDA margins rising 700 basis points to 22%, with further improvements expected to reach 40% gross margins and 25% EBITDA margins by year-end. The company’s portfolio has strategically shifted from being 75% motors-focused to a more diversified mix with 75% now in industrial power transmission and automation.
Looking forward, Regal Rexnord Corporation (NYSE:RRX) expects to generate $1 billion in annual free cash flow, targeting a mid-teens cash flow margin. The company plans to use this cash flow primarily for debt reduction over the next 18 months, which could create significant upside for equity holders. Growth initiatives include increasing new product vitality from 10% in 2024 to 20% in 2027, focusing on solutions and systems, and leveraging cross-selling opportunities. The company has identified nearly 50% of its sales in markets benefiting from secular tailwinds and plans to continue raising this exposure through strategic investments and M&A. Management believes the company is currently undervalued, trading at a free cash flow yield above 8%, with multiple catalysts for revaluation. With a forward P/E of 10.54, RRX is one of the oversold stocks to buy according to hedge funds.
Overall RRX ranks 8th on our list of the 12 oversold value stocks to buy according to hedge funds. While we acknowledge the potential of RRX 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 time frame. If you are looking for an AI stock that is more promising than RRX 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.
