Top 5 Stocks Under $10 Poised to Explode

At times, the market can be a one-way street; a stock can trend in a certain direction for many quarters, seemingly on sentiment alone. In other cases, the market can change its mind suddenly and investors will pile into or flee stocks all at once based on the latest news or trading patterns (i.e. short squeezes). In this article, we cover five stocks that the hedge funds and institutional investors in our database love, all of which trade for under $10 a share. Because many of these stocks have been beaten-up or highly shorted, they each have potential to surge if good news hits. These stocks are Sunedison Inc (NYSE:SUNE), Staples, Inc. (NASDAQ:SPLS), MGIC Investment Corp. (NYSE:MTG), Office Depot Inc (NASDAQ:ODP), and Alcoa Inc (NYSE:AA), and we’ll look at each of them in detail below.

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation at present, hedge fund experts at Insider Monkey look at the aristocrats of this group, around 730 funds. Contrary to popular belief Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 102% since the end of August 2012 and beaten the S&P 500 Index by 53 percentage points (see the details here).

#5 Alcoa Inc (NYSE:AA)

 – Number of Hedge Fund Holders (as of September 30): 46
– Total Value of Hedge Fund Holdings (as of September 30): $1.59 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 12.60%

Seeing as China’s economy isn’t exactly the best picture of health right now, it’s not surprising that shares of Alcoa Inc (NYSE:AA) are down by over 40% year-to-date. Commodity prices have gone south as demand declines and investors lose faith in the investment thesis. Not helping matters is the increasing Chinese aluminum exports and the falling yuan. Alcoa’s management is trying to fix the stock by splitting the company into two parts (one part upstream/midstream and one part downstream) in a move that should help the market recognize Alcoa’s value. Paul Singer’s Elliott Management recently took a 6.4% stake in the company, perhaps foreshadowing cost cuts down the road. If the Chinese economy starts showing signs of recovering, look for Alcoa to surge.

#4 Office Depot Inc (NASDAQ:ODP)

 – Number of Hedge Fund Holders (as of September 30): 47
– Total Value of Hedge Fund Holdings (as of September 30): $964.83 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 27.40%

On December 7, Office Depot Inc (NASDAQ:ODP) shares fell by more than 15% after the FTC announced that it will try to block the planned merger between Office Depot and Staples. In February, Staples offered to buy Office Depot for $7.25 in cash plus 0.2188 shares of Staples, Inc. (NASDAQ:SPLS) for each share of Office Depot. Federal regulators have expressed concerns about the effect on competition, given that Office Depot and Staples make up a substantial portion of the bulk office supply market. Staples has tried to please regulators by making several concessions over the last few quarters (such as promising to sell more assets after the deal closes to increase competition) but apparently the company’s efforts weren’t enough.

#3 MGIC Investment Corp. (NYSE:MTG)

 – Number of Hedge Fund Holders (as of September 30): 47
– Total Value of Hedge Fund Holdings (as of September 30): $1.34 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 42.50%

MGIC Investment Corp. (NYSE:MTG) benefits if the housing market and U.S economy remain strong. Given that the company’s claim payments decline as more people find quality jobs, MGIC Investment Corp’s earnings have been healthy in the past few years. Given next year’s election, if the U.S government decides to pull back the FHA’s role and leaves the mortgage insurance industry to private hands, look for MGIC to do very well. Among the 47 smart money funds long the stock at the end of the third quarter was Doug Silverman and Alexander Klabin‘s Senator Investment Group.

#2 Staples, Inc. (NASDAQ:SPLS)

 – Number of Hedge Fund Holders (as of September 30): 54
– Total Value of Hedge Fund Holdings (as of September 30): $1.34 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 17.70%

Like Office Depot, Staples, Inc. (NASDAQ:SPLS)’s stock has fallen substantially on the news that the FTC will block the merger between the two companies, owing to competition concerns. With its top line sluggish and impending new competition from internet startups and giants alike, Staples could really have used the $750 million in annual run-rate synergies that the merger would have unlocked. It’s not all bad news however. Staples is a value play, with a forward P/E of 10.36 and a dividend yield of 5.05%.

#1 Sunedison Inc (NYSE:SUNE)

 – Number of Hedge Fund Holders (as of September 30): 73
– Total Value of Hedge Fund Holdings (as of September 30): $1.06 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 46.80%

Despite Sunedison Inc (NYSE:SUNE) shares having been beaten-up and torn-apart over the past two quarters, the smart money is still bullish on the stock. 73 elite funds such as David Einhorn‘s Greenlight Capital and Larry Robbins’ Glenview Capital were long the stock at the end of the third quarter, as SunEdison has plenty of attractive assets that it can sell to placate the market’s liquidity concerns. If SunEdison can get past the market’s risk-off phase and restore confidence in its outlook and management team, it can access growth capital and rebound nicely. Given the 37% of the float that is short, a few short squeezes might also occur.

Disclosure: None