We recently compiled a list of the 10 Most Undervalued Mid Cap Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Valaris Limited (NYSE:VAL) stands against the other undervalued mid cap stocks.
Mid-cap stocks are often seen as a balanced investment option. They offer a mix of growth potential and financial stability, and have historically outperformed large-cap and small-cap stocks over longer periods for this reason, as mentioned earlier in February by Simeon Hyman, Global Investment Strategist at ProShares Advisors. We covered his detailed sentiment in our 10 Best Performing Mid Cap Stocks to Buy According to Analysts article. Mid-caps are considered undervalued in some cases and provide opportunities for investors seeking quality at a discount. Their domestic focus and higher earnings quality compared to small caps make them an attractive choice for stable growth.
This sentiment was covered earlier on January 25 by Jill Carey Hall, BofA global research head of US small and mid cap strategy. She appeared on CNBC’s ‘Closing Bell’ to discuss small cap headwinds and the opportunity in domestic mid caps due to a tough backdrop for the Russell 2000. The profits growth recovery story for small caps, which many investors were optimistic about last year, has continued to be revised downward and pushed further into 2025. As a result, small-cap profits have continued to disappoint, with negative year-over-year earnings growth still prevalent. In contrast, mid-caps have shown better fundamentals. Hall emphasized that if the market broadens out, mid-caps could offer the best risk-reward, especially in an environment where multiple rate cuts have been priced out of the market. Her economists at BofA expect the Fed to remain on hold without further cuts. This scenario poses refinancing risks for small caps, which have reemerged as rate risks have increased. Mid-caps, however, have better balance sheets and fundamental trends, making them a preferable choice within the small and mid-cap space.
Interest rates also influence small-cap performance. Despite optimism around the economy and potential policies from Trump 2.0, small caps have struggled to achieve sustained gains after brief rallies. Historically, small caps have underperformed for over a decade. While relative valuations suggest they could outperform over the next decade, near-term challenges persist. Investors are cautious due to high expectations and ongoing profit disappointments. Hall noted that rate stabilization or potential rate cuts could support small caps, but Fed policy has been a major driver of recent volatility in this segment. For instance, December marked the worst month for small-cap performance relative to large caps in over 25 years following a hawkish Fed meeting. This year, Hall recommended focusing on companies with strong profits, lower leverage, reduced refinancing risks, or economic sensitivity. Financials appear well-positioned to benefit from potential deregulation or an uptick in M&A. Additionally, stocks with upward earnings revisions have outperformed recently and remain attractive targets.
Methodology
We used the Finviz stock screener to compile a list of the top mid-cap stocks that were trading between $2 billion and $10 billion, and had a forward P/E ratio under 15 each. We then selected the 10 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 Q4 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
A closeup of an offshore oil rig in the international oil and gas industry in the Gulf of Mexico.
Valaris Limited (NYSE:VAL)
Forward P/E Ratio as of March 5: 5.43
Number of Hedge Fund Holders: 49
Valaris Limited (NYSE:VAL) is a leading offshore drilling contractor that operates a diverse fleet of drillships, semisubmersibles, and jackups. It provides crucial drilling services to oil and gas companies across global offshore locations.
Its Floater segment involves deepwater drilling operations. It’s a primary driver of revenue, particularly due to its fleet of high-specification and seventh-generation drillships. The company has 15 floaters, with 12 being advanced drillships, which indicates a focus on modern and technically capable assets. The company is pursuing long-term contracts and tracking 20+ opportunities with durations of at least one year. It’s anticipating ~30 potential contracts when Petrobras launches new tenders.
The company is managing its fleet by retiring older and less efficient rigs. Recently, it announced the retirement of 3 semisubmersibles, which included 1 active rig. Lower floater utilization is expected to impact 2025 revenues and contribute to a forecasted decline compared to 2024. However, Valaris Limited (NYSE:VAL) is actively lowering costs for rigs (that are expected to have idle time) to mitigate this impact. It has 4 drillships with uncontracted time in 2025, with expected idle time for 3 of those drillships after their current contracts end.
Praetorian Capital believes that the company is significantly undervalued. It is poised for substantial profit as the decade-long offshore drilling bear market reverses, given its vast and valuable fleet. It stated the following regarding Valaris Limited (NYSE:VAL) in its Q4 2024 investor letter:
“In 2010, at the dawning of the age of shale, offshore oil production accounted for approximately 31% of global oil supply. As shale has encroached on offshore, that number has declined to only 27% of total oil production in 2024. As you can imagine, this has led to a bear market in offshore services equipment that has lasted for more than a decade and bankrupted almost all players in the sector. This offshore equipment (Drillships, Semi-Subs, Jackups, PSVs, AHTS, and other associated pieces of highly engineered steel) is what we own through positions in Valaris Limited (NYSE:VAL), Tidewater (TDW -USA) and Noble (NE – USA), as I believe that the decade-long bear market has now ended, and that the call on this equipment will lead to excess profits for these companies for many years into the future.
Since Valaris is this Fund’s largest position, I thought it would be helpful to focus the rest of our offshore services discussion on it, though we also have substantial positions in Tidewater, the world’s largest player in Offshore Service Vessels (OSVs) and Noble, another owner of high-spec Drillships. At the close of trading on December 2024, Valaris had a market cap of $3.15 billion, and a net debt position of appx. $800 million (as of Q3 2024), for an Enterprise Value of approximately $3.9 billion. What do you get for this price?? You get 12 of the higher spec 7th Generation Drillships, and 1 of the better 6th Generation Drillships. You also get 5 Semi-Subs, 33 modern Jackups (JU) and a 50% ownership in a JU joint-venture with Saudi Aramco (ARO) that owns an additional 9modern JUs. By our math, it would cost well in excess of $1 billion to build and activate each fully equipped 7G, and in excess of $ $250 million per JU. Not that anyone would try to recreate this selection of assets today through a newbuilding program, but you’d be hard pressed to do it for under $25 billion—making our $3.9 billion EV an interesting starting point for us as value investors…” (Click here to read the full text)
Overall VAL ranks 8th on our list of the most undervalued mid cap stocks to buy according to hedge funds. While we acknowledge the potential of VAL 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 time frame. 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.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.