In this article, we will discuss the 10 Best Affordable Stocks Under $40 According to Short Sellers.
Several traders tend to profit from stocks through appreciation. However, some do the opposite– their idea is to profit from stocks when their value declines. This happens through a strategy known as short selling. In simple words, short selling means borrowing a security whose price is expected to fall and then selling it in an open market. Later, the trader buys that same stock back, hopefully at a lower price than initially sold for. The trader then returns the borrowed stock to the broker and pockets the difference.
Short interest serves as a barometer of investor sentiment towards a stock, sector, or market. Short interest represents the number of shares that have been sold short and are still outstanding. Since short sellers tend to benefit from the decline in the stock price, rising short interest generally signals higher negative investor sentiment. On the other hand, declining short interest means investors are becoming less bearish.
Short Sellers Made Fortunes Despite S&P 500 Touching Record Highs
Bloomberg reported that short sellers saw a strong 2Q 2024, despite the broader market touching record highs.
Over the past 6 months, the S&P 500 saw an increase of over ~11%. How did the short sellers make money in this environment? Short sellers amassed about $10 billion in paper profits during 2Q 2024.
The paper earnings from sectors like industrials, health care, and financials were able to offset the $15.7 billion mark-to-market losses experienced in technology.
This means that investors continue to flock to just a few mega-cap technology stocks amid a challenging macroeconomic backdrop. Therefore, there were some areas of weakness in other sectors. During the quarter ended 28 June, the tech-heavy Nasdaq 100 Index saw an increase of over ~7%. Meanwhile, the energy sector witnessed the most short covering during 2Q 2024.
Short Sellers Saw Record Weekly Profits Due to Broad-Based Tech Decline
While the short sellers saw losses in 2Q 2024 as a result of broad-based buying in the technology stocks, the group was able to pocket some gains in early April 2024. Reuters reported that traders who bet against the “Mag 7” group of the US technology stocks were able to book their biggest-ever weekly profit of over $10 billion in mid-April. During that time, the tech-heavy Nasdaq Composite Index and S&P 500 saw 6 straight sessions of declines as there was high inflation and evidence of resilience in the US economy. As a result, the rate cut hopes were hampered, benefiting the group of short sellers.
As per LSEG (London Stock Exchange Group plc) data, overall, Big Tech shed ~$1 trillion in their market cap.
Short Bets Have Now Declined, Large Bank Says
JPMorgan believes that consecutive highs in the broader US stock market turned short selling into a difficult trade. Therefore, the bets against the US indexes have now tumbled. The declining short interest continues to provide steady support to the US equities, helping to suppress volatility. Experts opine that there are 3 critical factors, because of which it was difficult to bet against the market situation.
Firstly, the short bets are expensive to maintain if the stock starts climbing, a risk that holds significance in today’s bull run. The excitement around artificial intelligence (Al), the potential for rate cuts, and the state of the broader economy have all been factored in. Secondly, analysts believe that regulators have added restrictions to short selling, as they have mandated transparency and added costs to short sellers that target equities. Finally, the industry players continue to back out as they face a rising wall of participating retail investors.
Our methodology
To compile the list of 10 Best Affordable Stocks Under $40 according to short sellers, we used the Finviz screener and shortlisted the stocks with prices less than $40. Then, we selected the stocks that have a forward P/E multiple of less than ~22.40x (since the broader market trades at a forward P/E of ~22.40x). Finally, we picked stocks that were the most popular among hedge funds and had low short interest. The stocks are ranked in descending order of their short interest.
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).
10 Best Affordable Stocks Under $40 According to Short Sellers
10) Pinterest, Inc. (NYSE:PINS)
Forward P/E Ratio as of 26 August: 17.85x
Share Price as of 26 August: $31.70
Number of Hedge Fund Holders: 61
Short % of Shares Outstanding (31 July 2024): 4.10%
Pinterest, Inc. (NYSE:PINS) operates and maintains social networking site. It offers an online venue for personal photos, ideas, oddities, decorations, and other items.
Pinterest, Inc. (NYSE:PINS) demonstrated strong progress in 2Q 2024, with sales reaching $853.68 million. This equates to a 20.5% rise on the YoY basis. It achieved profitability with a net income of $8.89 million as compared to a net loss of $34.94 million in 2Q 2023. This exhibits improvement in operational efficiency and strategic partnerships such as VTEX’s integration for social commerce expansion.
Pinterest, Inc. (NYSE:PINS) took numerous steps to better monetize the audience. Since 2023, the company enhanced its click-through rates. Its API initiative for third-party integration seems to be working as ~40% of revenue has been coming from that step, as highlighted in its 1Q 2024 earnings call. This exhibits a rise from 28% of total revenue.
The company has also been capitalizing on the AI trend. In 2Q 2024, the company mentioned that advertisers continue to see improved performance throughout key objectives on Pinterest – from brand awareness to conversion. This was supported by its initiative to roll out AI-powered products and experiences. Thus, the company continues to gain a share of advertising budgets.
Moving forward, a stable ad market and strength from the retail vertical should act as tailwinds. Moreover, the early stages of third-party partnerships with Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc. (NASDAQ:GOOG) continue to exhibit promising growth. Wall Street analysts opine that Pinterest, Inc. (NYSE:PINS)’s partnership with Amazon.com, Inc. (NASDAQ:AMZN) should improve the former’s revenue. This year the partnership should bring in ~$120 million of incremental revenue.
Analysts at Sanford C. Bernstein raised their target price on shares of Pinterest, Inc. (NYSE:PINS) from $35.00 to $38.00, giving it a “Market Perform” rating on 1st May. As per Insider Monkey’s 2Q 2024 data, 61 hedge funds were long Pinterest, Inc. (NYSE:PINS).
Meridian Funds, managed by ArrowMark Partners, released its fourth quarter 2023 investor letter. Here is what the fund said:
Pinterest, Inc. (NYSE:PINS) is a social media platform that enables visual discovery and generates revenue mainly through online advertising and e-commerce. Earnings declined after the company saw tremendous user and revenue growth in 2020- 2021 and grew operating expenses as if the pandemic-fueled growth trajectory would continue. Normalized growth trends and a macro slowdown that affected ad spend eventually hurt earnings per share. We believed that Pinterest had a significant opportunity to resume earnings growth because: 1. Pinterest has an attractive franchise and appears under-monetized vs. social media peers given how well its user experience lends itself to online shopping. 2. Its new CEO, who led commerce initiatives at Google, may portend a virtuous self-help/self-improvement opportunity to unlock monetization. 3. The high levels of operating expense growth vs. sales prior to our investment provides an opportunity for leverage and expense reductions to improve earnings.
Pinterest’s stock performed well in the quarter as the thesis played out and the company reported strong results while raising 2023 guidance. We pared back our position during the quarter due to stock appreciation and as the investment becomes less contrarian as our thesis plays out.”
9) JD.com, Inc. (NASDAQ:JD)
Forward P/E Ratio as of 26 August: 7.55x
Share Price as of 26 August: $25.80
Number of Hedge Fund Holders: 59
Short % of Shares Outstanding (31 July 2024): 1.89%
JD.com, Inc. (NASDAQ:JD) is an online direct sales company in China. It provides a wide selection of products through its website and mobile applications.
In the medium term, JD.com, Inc. (NASDAQ:JD) is expected to see stable margins. This comes after the firm cut its unprofitable businesses like community group purchase, Jingxi, and international businesses in 2022. The company is expected to focus on high-quality profitability rather than low-quality growth.
Over the long term, JD.com, Inc. (NASDAQ:JD) is expected to see expansion in its margins as a result of increasing scale from 1P and 3P businesses. A larger scale in each category should increase its bargaining power with suppliers. Since 2016, the company has no longer been fully reinvesting the gains from improved scale. It is focused on delivering annual margin expansion over the long run.
Therefore, the increase in mix from higher-margin third-party platform businesses together with efficiency of scale should help in lifting its margins.
In 2Q 2024, JD.com, Inc. (NASDAQ:JD)’s total revenues saw an increase of 1.2% YoY to US$140.1 billion. The company navigated a high base in the electronics and home appliances category from last year, with growth in its general merchandise category, mainly supermarkets, remaining robust.
The shares of JD.com, Inc. (NASDAQ:JD) were upgraded by analysts at JPMorgan Chase & Co. from a “Neutral” rating to an “Overweight” rating. They gave a price target of $36.00, up from $33.00 on 16th August 2024. Additionally, 59 hedge funds held stakes in the company as of the end of the second quarter, according to the Insider Monkey database.
Ariel Investments, an investment management company, released its first-quarter 2024 investor letter and mentioned JD.com, Inc. (NASDAQ:JD). Here is what the fund said:
“We initiated a position in China-based technology-driven E-commerce company, JD.com, Inc. (NASDAQ:JD). The brand has long been known across the region as a superior online shopping channel due to its unique first-party model and unparalleled fulfillment service underpinned by JD Logistics. Yet, a challenging macro environment drove shares lower as shoppers began seeking bargains. In response, the company made significant investments in elevating its third-party merchant platform to enhance its variety of product offerings and price competitiveness for consumers. We believe these actions will yield an improved product mix, stronger top-line growth and margin expansion on a go-forward basis.”
8) Baker Hughes Company (NASDAQ:BKR)
Forward P/E Ratio as of 26 August: 15.72x
Share Price as of 26 August: $35.43
Number of Hedge Fund Holders: 41
Short % of Shares Outstanding (31 July 2024): 1.68%
Baker Hughes Company (NASDAQ:BKR) is a global leader in oilfield services and oilfield equipment. It has a strong presence in the artificial lift, specialty chemicals, and completions markets.
Because of growing demand for clean energy and the need to curb greenhouse gas emissions, several countries continue to make investments in LNG terminals. Therefore, this provides Baker Hughes Company (NASDAQ:BKR) an opportunity to expand its reach beyond oilfields to capitalize on contracts for manufacturing equipment which is being utilized in LNG facilities.
Baker Hughes Company (NASDAQ:BKR) has been maintaining a significant share in several end markets, which include specialty chemicals and directional drilling. Also, it has maintained its leading market position in specialty chemicals. The majority of the company’s revenue comes from international (non-US markets). These markets are less volatile. Given that the demand for oil and gas should remain elevated over the next few years, Baker Hughes Company (NASDAQ:BKR) is expected to see strong earnings growth moving forward.
In 2Q 2024, the company’s revenue came in at $7,139 million, exhibiting a rise of 11% sequentially and an increase of 13% YoY. This YoY rise in revenue was mainly due to higher volume in both IET (Industrial & Energy Technology) and OFSE (Oilfield Services & Equipment) segments.
Analysts at Jefferies Financial Group increased their price target on shares of Baker Hughes Company (NASDAQ:BKR) from $46.00 to $48.00. They gave a “Buy” rating on 29th July. On the other hand, 41 hedge funds out of 912 tracked by Insider Monkey held stakes in the company as of the second quarter.
ClearBridge Investments, an investment management company, released its third quarter 2023 investor letter and mentioned Baker Hughes Company (NASDAQ:BKR). Here is what the fund said:
“Performance was boosted in the quarter by the Strategy’s more economically-sensitive holdings among steady compounders and evolving opportunities. Oilfield equipment and services provider Baker Hughes Company (NASDAQ:BKR), meanwhile, benefited from a $20 rise in crude oil prices as well as disciplined execution.”