In this piece, we will take a look at the top 10 ADR stocks to buy according to hedge funds.
Diversifying an investment portfolio is one of the best ways of spreading risk and minimizing the impact of heightened volatility. While the focus is usually on investing in stocks in various sectors, it’s also prudent to spread risk across multiple countries. American Depositary Receipts (ADRs) offer one of the best ways of spreading risks into companies in various markets instead of focusing on U.S. companies
ADRs are simply securities issued by banks that represent shares of non-U.S. companies. The stocks are often listed in national exchanges and offer a way of investing in foreign companies.
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Global corporations financing, building, and powering the traditional global economy are increasingly surpassing American businesses that once held the top spot in market success. Likewise, companies operating in the more established value sectors, such as Europe, China, and Japan, offer high risk reward opportunities at discounted valuations.
The top 10 ADR stocks to buy, according to hedge funds, are way cheaper, with their valuations sitting near 10-year low multiples. The cheap valuations and prospect of significant upside potential make them attractive compared to mainstream U.S. companies.
As investors endure uncertainty about U.S. interest rates that remain at highs of between 5.25% and 5.50%, many are increasingly paying attention to international equities trading at discounted valuations.
The prospect of lower interest rates before year-end is one catalyst that should continue strengthening sentiments in the equity markets. ADR stocks listed in the U.S. market should be one of the biggest beneficiaries as investors look to diversify their portfolios.
While investors have pulled more than $12 billion in mainland Chinese equities since June, the Financial Times reports that professional investors stay put in foreign stocks, as they offer significant upside potential.
The UK also continues to offer exposure to some of the best stocks right now in the aftermath of the Bank of England cutting interest rates in early August. With one more cut expected before year-end, analysts believe the lower interest rate environment would be positive for the stock market, which should benefit some of the top ADR stocks listed in the US.
Over the past few years, UK companies have been moving into the US to seek broader investor exposure. As late as two decades ago, UK-listed companies accounted for 11% of the MSCI World Index. Now, the figure has dropped to 4% as most companies seek listing in the US owing to the country’s less stringent standards.
While the S&P 500 is up by about 17% for the year in anticipation of the FED cutting rates, the S&P Global 1200 ADR Index is only up by 11% year to date. The underperformance is not a point of concern but affirms that there is plenty of room for growth for most of the ADR stocks.
Amid the high interest rate environment, signs of the US economy plunging into recession are becoming ripe daily. According to CNBC, the country’s unemployment rate rose to 4.3%, its highest level since 2021.
Similarly, U.S. manufacturing fell to an eight-month low, signaling economic weakness amid the high interest rates. Analysts at BCA Research believe the upcoming interest rate cuts could be insignificant in averting the economy plunging into recession.
“Every single one of us now believes there’s a recession, and that’s exactly the opposite of what the market believes. There’s things that are breaking down quite rapidly now. A few rate cuts are not going to prevent a recession. Average recession is 10 months… It takes something like a year before fed cuts start to give a boost to the economy,” Garry Evans, BCA Research’s chief strategist of global asset allocation, told CNBC’s “Squawk Box Asia.”
Amid the recession concerns, U.S. stocks could come under pressure. On the other hand, the Top 10 ADR stocks to buy according to hedge funds could act as safe havens as most are in jurisdictions with low interest rates.
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Our Methodology
To compile the list of Top 10 ADR stocks to buy according to hedge funds, we analyzed the major US indices and settled on stocks of foreign companies with more than 50% upside potential. Once we had consolidated the list, we ranked the stocks in ascending order based on the number of hedge funds that owned it.
At Insider Monkey, we are obsessed with 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).
Top ADR Stocks To Buy According to Hedge Funds
10. Zai Lab Limited (NASDAQ:ZLAB)
Number of Hedge Fund Holders: 12
Stock Upside Potential: 125.94%
Zai Lab Limited (NASDAQ:ZLAB) is one of the top 10 ADR stocks to buy, according to hedge funds, as it develops and commercializes much-needed therapies for treating oncology autoimmune disorders and infectious diseases. The company has achieved significant commercial growth and maintained financial discipline while developing its product portfolio.
Zai Lab Limited (NASDAQ:ZLAB)’s revenue in the second quarter grew by 45% to $100.1 million as the company benefited from strong demand for VYGART, its lead product for treating myasthenia gravis. Additionally, the company benefited from increased hospital sales of ZEJULA, its lead product for treating ovarian cancer.
Efforts to build a more robust and efficient organization, coupled with our innovative pipeline, positions the biotechnology company for robust topline growth and closes in on profitability by 2025.
“In the second quarter, we achieved impressive commercial growth, maintained financial discipline, and made significant strides across our product portfolio, highlighting our capability to execute on our strategic objectives,” said Dr. Samantha Du, Founder, Chairperson, and Chief Executive Officer of Zai Lab Limited (NASDAQ:ZLAB).
Even though Zai Lab Ltd experienced a total loss of $80.3 million for the quarter, its financial stability is still strong, holding a cash balance of $730.0 million as of June 30, 2024. The firm is persistently concentrating on bringing VYVGART to market and the expected introduction of numerous new products and uses.
The average price target on Zai Lab Limited (NASDAQ:ZLAB) is $40.67 implying upside potential from current levels. Additionally, the number of hedge funds holding stakes in the company dropped to 12 in Q2 2024 from 16 in Q1. Michael Rockefeller And Karl Kroeker’s Woodline Partners is the largest hedge fund shareholder, owning 2.33 million shares valued at $40.42 million.
9. MINISO Group Holding Limited (NYSE:MNSO)
Number of Hedge Fund Holders: 15
Stock Upside Potential: 84.50%
MINISO Group Holding Limited (NYSE:MNSO) is a Chinese company that sells lifestyle and pop toy merchandise. It offers items across different types, such as home decor items, tiny electronics, fabrics, accessories, and beauty instruments.
Amid the slowdown in the Chinese economy, MINISO Group Holding Limited (NYSE:MNSO) continues to deliver better-than-expected results, affirming growth in the core business. In its fiscal third quarter, revenues were up 26% to $515 million, driven by a 19.3% increase in the average store count and 9% same-store sales growth. Revenue generated overseas was up 53%.
Adjusted net profit in the quarter under review was $85.4 million, representing an increase of 27.7% Y/Y. Adjusted net margin was 16.6%, compared to 16.4% in the year-ago period. The better-than-expected results demonstrate the strength of the business model while reflecting MINISO Group Holding Limited (NYSE:MNSO)’s ability to execute its I.P. and globalization strategy.
Mr. Guofu Ye, Founder, Chairman, and CEO of MINISO, commented, “This past March Quarter has seen our fastest pace of store openings for the first quarters ever, establishing a robust foundation towards our goal of a net addition of 900 to 1,100 stores in 2024. We also embarked on our path towards our five-year strategic goal with a stronger March Quarter compared to the high base of the same period of 2023. We are pleased to see the initial effect from our I.P. and globalization strategies and as a result, our total revenue reached RMB3.7 billion with a 26% increase year over year, which was primarily attributable to a 19% increase in average store count and a 9% same-store sales growth.”
The solid financial results are one reason MINISO Group Holding Limited (NYSE:MNSO) commands an average price target of $29.60, implying an 84.50% upside potential from current levels. According to the Insider Monkey database, 15 hedge funds held stakes in the company as of the end of Q2 2024.
8. Arcadium Lithium plc (NYSE:ALTM)
Number of Hedge Fund Holders: 19
Stock Upside Potential: 71.27%
Based in Shannon, Ireland, Arcadium Lithium plc (NYSE:ALTM) is a leading provider of lithium chemicals in high demand for batteries for electric vehicles. It offers battery-grade lithium hydroxide, lithium carbonate, butyl lithium, and high-purity lithium metal for electric vehicles and electronics.
Arcadium Lithium plc (NYSE:ALTM) has been under pressure due to the lithium market’s weakness. However, the situation is not expected to stay still forever, and lackluster electric vehicle demand should improve; consequently, fuel demand for the company’s battery fades lithium hydroxide.
The temporary oversupply issues that have hit the sector are expected to dissipate, leading to higher lithium prices and benefiting Arcadium Lithium plc (NYSE:ALTM). Additionally, the company stands out as one of the top 10 ADR stocks to buy according to hedge funds, having emerged as a potential acquisition target.
Arcadium Lithium plc (NYSE:ALTM) has emerged as a potential acquisition target for Rio Tinto amid consolidation in the industry. Companies are increasingly looking for ways to bolster their lithium reserves amid the E.V. revolution, fuelling a wave of M.A. in the sector.
The average price target on Arcadium Lithium plc (NYSE:ALTM) stock is $4.59, potentially implying a 71.27% upside. Additionally, 19 hedge funds tracked by Insider Monkey held stakes in the company as of the end of the second quarter.
FPA Queens Road Small Cap Value Fund stated the following regarding Arcadium Lithium plc (NYSE:ALTM) in its Q2 2024 investor letter:
“Arcadium is an unusual investment for us. We normally avoid the commodity and materials sectors, and have kept our position in Arcadium small. But we believe Arcadium has a unique position in an industry with a strong long-term outlook. The company has low-cost production assets, is virtually debt-free, and has considerable capacity additions planned near-term.”