In this article, we present the list of the 10 best cheap stocks to buy now according to Ray Dalio. Click to skip ahead and see the 5 best cheap stocks to buy now according to Ray Dalio.
Ray Dalio is the Founder, Co-Chairman, and Co-Chief Investment Officer of Bridgewater Associates, the largest hedge fund in the world with over $140 billion in assets under management. Under his leadership of nearly four decades, the firm has grown into the fifth most important private company in the US, according to Fortune Magazine.
Bridgewater Associates has been one of the most successful hedge funds in the world, delivering average annualized gains of 10.4% since 1991. However, the fund had not evaded the negative impact of COVID-19 as its flagship Pure Alpha II fund had lost 18.6% through August.
Despite the hit of the pandemic, Dalio has been optimistic about the future early on, mentioning that “We’re now in a wonderful revolution in terms of the capacity to think and use that in a way. I would say that is absolutely the most treasured thing in the future.” This long-term perspective has previously translated into successful recoveries during tough times. The fund suffered losses during the dot-com crash in 2000 (22%) and the financial crisis in 2008 (20%) but managed to bounce back with 20%+ gains between 2002 and 2004 and 45% and 25% gains in 2010 and 2011 respectively.
If you’re looking for the best cheap stocks to buy now that smart investors have taken advantage of, Dalio’s most recent moves show some clear trends in this direction. Bridgewater Associates added multiple healthcare stocks, which could benefit from the ongoing and increasingly followed progress in medicine. Other new investments have been made in food industry giants and producers of consumer staples, the demand for which has been positively impacted by the pandemic.
There’s a very good reason why we pay close attention to hedge fund sentiment before making investment decisions. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, though the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 78 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
For the best cheap stocks to buy right now, we looked into Ray Dalio’s top positions in his fresh 13F filing and identified the 10 cheapest stocks with a P/E ratio of 20 or lower among these biggest positions. You might say “hey, a P/E ratio of 20 isn’t cheap”, but compared to S&P 500 Index’s trailing P/E ratio of 37, these stocks are cheap. Here are the best cheap stocks to buy right now according to billionaire Dalio:
10. The Kroger Co. (NYSE:KR)
We begin with The Kroger Co. (NYSE:KR), an American retailer, currently valued at $25 billion. Bridgewater’s position in Kroger at the end of September was worth $10 million, after a significant increase of 953% during Q3. Clearly, Bridgewater wants to solidify its stake in the company, as consumer staples industries have performed well during the pandemic.
Kroger has shown signs of improving profitability during Q2, as operating income was 2.7% of total sales compared to 2% in the previous year. Nevertheless, KR investors should know that there is a decrease in overall hedge funds sentiment regarding the stock recently. At the end of September, 35 of the hedge funds tracked by Insider Monkey were long in the stock, a change of -6 from the previous quarter. Legendary Warren Buffett didn’t agree with the hedge fund crowd and were adding to his KR holdings during the third quarter (see the 10 stocks Warren Buffett just bought).
9. Tyson Foods Inc. (NYSE:TSN)
Next on the list is Tyson Foods Inc. (NYSE:TSN), the world’s major producer of beef, chicken, and pork. Dalio’s stake in TSN consists of 177,887 shares, valued at $10.6 million on September 30. The fund has been bullish on the stock, boosting its position by 1239% during Q3, contrary to the general bearish sentiment towards TSN. At the end of June, the stock was in only 37 hedge funds’ portfolios, relative to the all-time high statistic of 58 at the end of 2019. The number of hedge funds with bullish TSN positions continued its decline during Q3, dropping to 36.
The decrease in support of TSN is not surprising, as large processing plants have been hardly hit by the impact of COVID-19. The company suffered COVID-related expenses amounting to $540 million during FY2020, according to their latest Q4 report. Nevertheless, the company remains positive about the future, raising its quarterly dividend by about 6% to $0.445 per share (Class A) from Q3. TSN has a current P/E ratio of 12 and offers a 2.45% dividend yield. It also started outperforming the market over the last month. We believe it will continue beat the S&P 500 Index over the next 6-12 months as life goes back to normal.