We recently compiled a list of the 7 Mid Cap Stocks with Low PE Ratios. In this article, we are going to take a look at where Valaris Limited (NYSE:VAL) stands against the other mid cap stocks with low PE ratios.

The stock market has experienced a surge in activity recently, driven by positive investor sentiment and key decisions from the Federal Reserve. Even though the month of September began on a volatile note, with stocks facing multiple hurdles, optimism ultimately prevailed as markets ended the quarter on a high note. Throughout this period, the Federal Reserve’s policy moves played a crucial role in shaping market dynamics. By implementing interest rate cuts, the Fed provided much-needed relief to the markets, contributing to gains in major indices. Despite the ups and downs, investors managed to navigate the turbulent waters and ended up with a more positive outlook.

The rise in investor optimism can be attributed to various factors, including strong corporate earnings, positive economic indicators, and a general belief that the Fed will maintain its accommodative stance. This period has been marked by record gains in the equity market, leaving investors hopeful for continued growth. However, despite the bullish sentiment, caution still lingers as the market enters the historically volatile month of October. Concerns over potential economic slowdowns, geopolitical tensions, and unpredictable interest rate policies remain in focus.

Amidst these market movements, interest rate fluctuations have become a critical point of discussion. The Federal Reserve’s recent rate cuts were intended to support economic activity, yet the comments from Fed officials suggest that future rate decisions are not set in stone. As the Fed Chair mentioned in a recent statement, the central bank is not in a hurry to implement further rate cuts and will remain data-dependent in its approach. This cautious stance has left investors closely monitoring economic indicators and Fed communications for signs of the central bank’s next moves.

In parallel with interest rate dynamics, the short-term funding market has also shown signs of stress. The Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing cash overnight collateralized by Treasury securities, saw a notable increase. This rise in short-term borrowing costs reflects tighter liquidity conditions, especially at the end of the month and quarter. While such fluctuations are not uncommon during these periods, the recent surge has raised some concerns about the availability of cash in the market and potential funding pressures. The market’s response to these developments has been mixed, with some strategists suggesting it might be a temporary phenomenon, while others believe it could signal more persistent challenges in the funding markets.

Another critical indicator of market liquidity, the repo rates, also experienced upward pressure. This spike in repo rates can be a sign of scarce cash for financial institutions, and if left unaddressed, it could create further uncertainty in the markets. Analysts have pointed out that while short-term borrowing costs tend to rise at quarter-ends due to balance sheet adjustments by financial institutions, the magnitude of this increase was unexpected, indicating that the market’s capacity to provide liquidity might be more constrained than initially thought.

Moving forward, market participants will be paying close attention to economic data releases and the Fed’s future guidance on interest rates. With labor market data and inflation reports due later this month, any surprises could lead to heightened market volatility. Moreover, given October’s reputation for dramatic market swings, investors are likely to adopt a more cautious approach, balancing between optimism for continued growth and concern over potential setbacks.

A recent report by Reuters highlighted that despite the current funding pressures, the Federal Reserve remains confident in its ability to manage liquidity. The introduction of facilities like the Standing Repo Facility (SRF) aims to ensure that banks and other financial institutions have access to cash when needed, reducing the likelihood of market disruptions. While Monday’s surge in SRF activity was notable, subsequent declines suggest that these pressures might be temporary. Still, the Fed’s ongoing efforts to monitor and respond to changes in the repo and short-term funding markets will be crucial for maintaining stability in the months ahead.

As the market navigates these uncertain times, many investors are looking for opportunities in mid-cap stocks that offer strong growth potential at attractive valuations. One key indicator that has drawn interest is the price-to-earnings (P/E) ratio, which can provide insights into whether a stock is overvalued or undervalued relative to its earnings. While low PE ratios are attractive, they could also indicate value traps, therefore investors should conduct their own due diligence before initiating positions.

Our Methodology

For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $10 billion and having forward price to earnings (P/E) ratio of less than 5 as of October 2. We narrowed down our list to 7 stocks and ranked them in ascending order of the P/E ratio. We also examined Insider Monkey’s data on 912 hedge funds as of Q2 2024 and mention the hedge funds holdings in each stock.

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).

Valaris Limited (NYSE:VAL)

Forward P/E ratio as of October 2: 3.98 

Number of Hedge Fund Holders: 39

Valaris Limited (NYSE:VAL) is a major provider of offshore contract drilling services, operating across multiple regions, including the Gulf of Mexico, South America, the North Sea, the Middle East, Africa, and the Asia Pacific. The company’s extensive fleet of offshore drilling rigs—comprising drillships, semisubmersible rigs, and jackup rigs—positions it well to capitalize on the growing demand for oil and gas exploration. Valaris is a compelling mid-cap stock with a forward P/E ratio of just 3.98 as of October 2, 2024, making it an attractive inclusion in the list of mid-cap stocks with low P/E ratios.

Valaris Limited (NYSE:VAL) reported strong Q2 2024 earnings, showcasing its robust financial performance and operational efficiency. The company delivered an adjusted EBITDA of $139 million, significantly up from $54 million in the first quarter, and $150 million when excluding one-time reactivation costs. This growth was driven by a 99% revenue efficiency rate during the quarter, reflecting effective contract management and optimal utilization of its fleet. The company’s backlog also increased for the seventh consecutive quarter, reaching over $4.3 billion, highlighting its strong positioning in the offshore drilling market.

Moreover, Valaris Limited (NYSE:VAL) strategic execution of securing new contracts contributed to its backlog growth. The company recently announced a multi-year contract for Valaris DS-17, adding nearly $500 million to its backlog at a leading-edge day rate, which reflects the strength of customer demand in this space. Additionally, the average day rate for Valaris’s drillships within its backlog increased to $414,000 per day from $338,000 per day over the past year.

Despite the slight decrease in hedge fund holders, dropping to 39 in Q2 2024 compared to 43 in the previous quarter, investor interest remains steady given the company’s solid fundamentals and attractive valuation. With stable oil prices and positive industry trends, Valaris is well-positioned for continued growth. The company’s potential to generate sustained free cash flow and its strong backlog growth further enhance its investment appeal. Valaris Limited (NYSE:VAL) focus on reactivating high-specification rigs, such as the DS-7, to secure lucrative contracts should support future earnings and cash flow growth, making it a standout option among mid-cap stocks with low P/E ratios.

Praetorian Capital stated the following regarding Valaris Limited (NYSE:VAL) in its Q2 2024 investor letter:

“Valaris Limited (NYSE:VAL) has been rangebound for over two years now, awaiting the signing of new contracts at current market rates, that will replace expiring contracts that are frequently less than half of current prevailing rates. There have been some questions as to why the company has been slow to sign new contracts. However, I believe that management is trying to trade a slightly reduced price for increased duration of contract tenure, and that’s the reason for a lack of commentary on new contracts. Should the company announce new contracts at anywhere near current market rates, I believe that the shares will respond in a rather dramatic way—especially as Valaris is by far the cheapest of the large drilling companies (based on the enterprise value per rig metric), despite having one of the best fleets and strongest balance sheets. Between our common and warrant position, Valaris was our 2nd largest position at the end of June.”

Overall VAL ranks 6th on our list of the mid cap stocks with low PE ratios. While we acknowledge the potential of VAL as an investment, our conviction lies in the belief that some 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 VAL 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.