We recently published a list of 10 Most Promising Penny Stocks According to Hedge Funds. In this article, we are going to take a look at where Transocean Ltd. (NYSE:RIG) stands against other most promising penny stocks.
Value in Small-Caps
With the current resilience of the bull market, there is optimism surrounding the potential for the S&P 500 to close at 5,700 or higher by year-end, as pointed out by some experts. This positive outlook is driven by expectations of the Fed cutting interest rates and stimulus measures being implemented in key global markets. The interaction between monetary policy, geopolitical factors, and market sentiment will be crucial in shaping market dynamics in the coming months. Investors are encouraged to stay informed as they navigate this evolving landscape. Tom Lee, Fundstrat co-founder, appeared on CNBC a few days back to discuss the staying power of the current bull market. His overall market outlook was discussed in one of our other articles, 8 Most Profitable Penny Stocks To Invest In, here’s an excerpt from it:
“…He attributed this potential growth to a dovish Fed beginning to cut rates and the stimulus measures being implemented in China, which he believes will positively impact the market. With significant cash still on the sidelines, Lee sees a favorable environment for stocks over the next 3 to 12 months.
Despite Lee’s bullish outlook, he acknowledged that small-cap stocks have exhibited weakness since the Fed began raising rates. He noted that while small caps are within a few percentage points of their all-time highs, they have not performed as well as expected. The market’s current risk appetite is mixed, and with the upcoming election and elevated oil prices contributing to uncertainty, investors may be hesitant to take on new risks.”
However, on October 11, Sebastien Page of T. Rowe Price joined ‘Closing Bell’ on CNBC to discuss the bullish case for international small caps. Sebastien Page expressed a cautiously optimistic outlook for the stock market as the year progresses, particularly in light of a hotter-than-expected Consumer Price Index report. Page indicated that he is looking for opportunities to add risk heading into year-end, aligning with the sentiment that while many investors are comfortable with economic fundamentals, they remain uneasy about high valuations. He noted that the investment committee at T. Rowe Price shares this perspective, emphasizing a balanced approach where they are more likely to add to risk assets rather than reduce exposure in the coming months.
Page highlighted that their current strategy includes a slight overweight of half a percent in stocks compared to bonds, which marks an increase in risk appetite compared to previous conversations over the last 18 months. He acknowledged that while the overall market multiple may appear expensive, it is skewed by the largest market-cap stocks. This suggests that there are still opportunities beyond mega-cap names, which have become too consensus-driven and costly.
Addressing concerns about valuations, Page pointed out that while the price-to-earnings ratio appears high, it is essential to consider the context. He mentioned that if one adjusts for return on equity, current valuations may fall below historical medians. Additionally, he noted that the average stock globally trades at a P/E of about 13, which aligns with its long-term average. This indicates that while some segments may seem overvalued, many stocks are positioned reasonably relative to their historical performance.
When discussing international small-cap stocks, Page explained that despite macroeconomic challenges outside the US, international small-caps offer compelling fundamentals. He highlighted that these stocks have a return on equity that is twice as high as their US counterparts, presenting an opportunity for contrarian investment. Page believes that as global markets begin to perform better amid a broader easing cycle, international small caps could play a significant role in portfolio diversification.
His insights reflect a strategic positioning for potential market broadening and highlight the importance of looking beyond mega-cap stocks to identify value in various sectors and regions. His approach suggests optimism about the market’s ability to navigate current challenges while capitalizing on emerging opportunities as we approach year-end.
Methodology
We sifted through Finviz to compile an initial list of the top penny stocks, with a share price under $5. From that list, we narrowed our choices to 10 penny stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
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).
An aerial view of an oil rig with drillers in hard hats working on the platform.
Transocean Ltd. (NYSE:RIG)
Share Price as of October 11: $4.25
Number of Hedge Fund Holders: 42
Transocean Ltd. (NYSE:RIG) is the world’s largest offshore drilling contractor based on revenue, based in Switzerland, with offices in 20 countries. It owns and operates a fleet of offshore drilling rigs, which are used to explore and develop oil and gas fields in deepwater and ultra-deepwater environments. Its services are essential for the energy industry, as they help to extract valuable natural resources.
The company reported strong financial results in Q2 2024, with contract drilling revenue reaching $861 million, recording an improvement of 18.11% as compared to the year-ago period. It achieved a revenue efficiency of 97% and signed several high-value contracts in the US Gulf of Mexico, including a two-well contract with Beacon Offshore Energy at $580,000 per day and a 3-year contract with BP at $485,000 per day. These contracts are expected to contribute significantly to cash flow and help the company deleverage.
It recently secured two new contracts: a one-year contract for the Deepwater Atlas with BP in the US Gulf of Mexico, starting in Q2 2028, expected to add $232 million to the company’s backlog, and another 300-day program with Reliance Industries Limited for the Dhirubhai Deepwater KG1 for 6 wells offshore in India, starting in Q2 2026, expected to add $123 million to its backlog.
The company has secured contracts in Brazil and Norway that extend the firm duration of its rigs through 2025. Contract wins position it well to capitalize on the anticipated growth in global offshore drilling, with projections from Rystad Energy indicating that offshore exploration investments could more than double by 2027. Transocean Ltd.’s (NYSE:RIG) solid financial performance, coupled with increasing day rates, makes it an attractive investment.
Carillon Scout Mid Cap Fund stated the following regarding Transocean Ltd. (NYSE:RIG) in its fourth quarter 2023 investor letter:
“Transocean Ltd. (NYSE:RIG), a leader in deepwater offshore drilling rigs, was next among the losers in a generally weak energy group. Oil fell from recent highs, partially driven by Mideast tensions, and this hurt sentiment in the energy sector despite little change in offshore rig day-rate pricing or long-term fundamentals.”
Overall, RIG ranks 1st on our list of most promising penny stocks according to hedge funds. While we acknowledge the potential of RIG as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RIG 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.
