In this article, we present the list of the 10 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:
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).
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.
Dalio added 171,336 new shares of Kellogg Co. (NYSE:K) to his 13F portfolio during Q3, establishing a position worth $11 million. Kellogg’s is an American multinational food manufacturing company, popular for its cereal brands. The stock has seen fluctuating hedge fund sentiment throughout the year. The number of long positions in the stock increased by 23% during Q1. For example, Diamond Hill Capital, in its Q1 2020 Investor letter, highlighted Kellogg’s and their reasoning for investing in the stock:
“We initiated a position in Kellogg Co. which is the global leader in cereal across both the developed and developing world and a powerhouse in snacking with many recognizable brands such as Poptarts, RxBar, Cheez-Its, and Pringles.”
However, the mood changed during Q2, when hedge funds positions were reduced by 4 to 33 at the end of June. Year-to-date, the stock has a return of about -4% (through December 2nd), compared to the market’s return of 14.5%. Nonetheless, Kellogg’s investors value the company’s stability and consistency, as its Board of Directors announced in October a quarterly dividend of $0.57 per share of common stock (dividend yield of 3.6%). Kellogg’s trailing P/E is only 18. Once investors feel more confident about the pandemic and realize that it doesn’t make sense to buy bonds, they will flock into relatively cheaper dividend stocks like K.
286,909 shares of Archer-Daniels-Midland Co. (NYSE:ADM) were added to Bridgewater’s 13F portfolio during Q4, valued at $12.5 million. ADM is another American multinational in the food industry in which Dalio established a new position. At the end of Q3, ADM was in the portfolios of 26 hedge funds tracked by Insider Monkey, down by 2 from the previous quarter.
Besides Bridgewater, Diamond Hill Capital is another fund that sees potential in ADM’s future growth. The latter currently has the largest stake in ADM, worth $220.3 million at the end of Q3. Diamond Hill Capital has been hopeful about ADM since the beginning of the year, as they mentioned in their Q1 2020 investor letter:
“Agricultural commodities producer Archer-Daniels-Midland Co. outperformed after reporting solid quarterly results. The company benefited from the renewal of the biodiesel tax credit, as well as continued growth in its nutrition business. The company has heavy exposure to agriculture and basic food products and tends to perform well in times of market turbulence.”
ADM has a trailing P/E of 18 and has a 2.9% dividend yield.
We continue with Boston Scientific Corporation (NYSE:BSX), another new addition to Bridgewater’s 13F portfolio, comprising 329,968 shares worth $12.6 million. Boston Scientific is a manufacturer of medical devices that are used in interventional medical specialties. Overall hedge fund sentiment towards BSX has been bullish in recent months, as the number of bets at the end of Q2 aggregated to 66, compared to the previous all-time high of 59. This figure currently stands at 61 as a net of five hedge funds cashed out.
According to Yahoo Finance, the stock’s trailing PE ratio equals 13.11. The stock’s performance is fairly disappointing as it returned -2.7% during Q3 and underperformed the market’s return of 19.42%. On the other hand, the company is making significant R&D investments, which have been highlighted by Artisan Mid Cap Fund in its Q1 2020 Investor Letter. In September 2020 Boston Scientific Corp. announced an expanded investment and exclusive acquisition option agreement with Farapulse, Inc., whose technology specializes in various cardiac treatments. Here is what Scott Olson, senior vice president and president, Rhythm Management, Boston Scientific had to say:
“Our expanded investment in this technology, combined with our recent CE Marked cryoablation and contact force catheters with local impedance technology, affirms our commitment to offer physicians an innovative and comprehensive portfolio of electrophysiology products and services.”
We begin our 5 best cheap stocks bought by Ray Dalio’s Bridgewater Associates with General Mills, Inc. (NYSE:GIS), an American consumer food manufacturer. Bridgewater boosted its stake in GIS by 1277%, its current position being valued at $18.7 million. There were a total of 37 hedge funds with bullish GIS bets at the end of September.
Year-to-date, the stock returned about 19.5% (through December 2nd) and is currently valued at $36.8 billion. The company is emerging from the pandemic stronger and more profitable. On September 23rd, the company reported strong 2021 Q1 results; net sales have increased by 9% to $4.4 billion and operating profit – by 29% to $854 million. Another good news for GIS investors is the 4% increase in the quarterly dividend to $0.51 per share. General Mills (NYSE:GIS), together with its predecessor company, is proud to have paid dividends without interruption for 122 years. We have previously featured the stock in our top 10 best high dividend stocks to buy now.
333,804 is the number of shares held by Bridgewater Associate in CVS Health Corporation (NYSE:CVS) at the end of September, giving the firm a stake worth $19.5 million in the company. A total of 65 hedge funds tracked by Insider Monkey held long positions in the stock, down by 8% from one quarter earlier.
According to Yahoo Finance, the stock is trading at a trailing PE ratio of 11.51 and is valued at $91.14 billion. During Q3, the company has increased year-over-year revenues by about 3.5%. Miller Value Partners renewed its position in the stock during Q3. Here is what they had to say about CVS in their Q3 2020 Investor Letter:
“CVS is a name we owned earlier but exited in the COVID hit to deploy funds to names offering more significant near term recovery potential. CVS lagged in the ensuing recovery but we still think it’s an undervalued mix of businesses. If you value the pieces, a healthcare insurance company, a pharmacy benefits manager, and a retail pharmacy, you get values roughly 50% greater than the current stock price. We think its vertical integration strategy around lowering the cost of healthcare through “Health Hubs” offers you free option value at current prices. We used long-term call options which we thought offered favorable risk-return.”
Kimberly Clark Corporation (NYSE:KMB), the American personal care corporation, is a new addition to Bridgewater’s 13F portfolio at the end of September. Dalio’s stake is worth almost $25 million, consisting of 168,674 shares. The stock is trading at a modest trailing PE ratio of 20; hence, KMB made its way into our top 5 cheap stocks bought by Ray Dalio.
Hedge funds had been getting more optimistic about Kimberly Clark Corporation, as 41 funds tracked by Insider Monkey held long positions in the stock at the end of Q2, up by 4 from Q2. The company shows strong third-quarter results. Sales have increased by 1% to $4.7 billion compared to the year-ago period, mainly due to pandemic-driven demand. Here is what Chairman and CEO Mike Hsu said with regards to the company’s third-quarter results:
“We delivered solid organic sales growth in the third quarter, with good underlying performance and increased demand because of COVID-19. We also achieved $140 million of cost savings and returned approximately $560 million to shareholders through dividends and share repurchases. While earnings in the quarter were down as expected, we’re raising our full-year outlook and now expect adjusted earnings per share will grow 9 to 11 percent this year. We continue to execute our strategies well and remain very optimistic about our opportunities to deliver balanced and sustainable growth and create long-term shareholder value.”
Bridgewater increased its stake in Baidu, Inc. (NASDAQ:BIDU), a Chinese technology company offering Internet-related services and products. The firm’s position was worth $61.5 million at the end of September and consisted of 486,021 shares. There was no change in hedge fund interest towards the stock during Q2, with a total of 49 hedge funds tracked by Insider Monkey holding long positions in BIDU. However, the number of hedge fund positions dipped to 43 by the end of September.
According to Yahoo Finance, BIDU is trading at a trailing PE ratio of 11.20 and is worth $49 billion. The stock returned 19.86% from the end of June (through December 2nd), slightly more than the market’s return of 19.42% during the same period. The company is also reporting strong third-quarter financial results, having benefited from the recovery in the Chinese economy. Hermany Yu, CFO of Baidu highlights the following:
“Our team executed in the third quarter with top line growth, resilient profitability and strong cash flow, a testament to the durability of Baidu’s business, despite China experiencing a second wave of COVID-19 in July. Our focus on differentiating Baidu with open-platform, in-app search and new AI businesses has enabled Baidu Core’s adjusted EBITDA margin to reach 46% in the third quarter.”
On top of the list is NetEase, Inc. (NASDAQ:NTES), in which Bridgewater holds a position worth $69.5 million, consisting of 151,920 shares. The stock is trading at a trailing PE ratio of 13.21, according to Yahoo Finance.
The company shows solid financial results for Q3 2020 compared to Q3 2019; net revenues increased by 27.5% to $2.7 billion, and gross profit increased by 25.6% to $1.5 billion. NetEase’s revenues from the online gaming segment represent nearly three-quarters of its total revenues in Q3, with mobile gaming accounting for the largest portion of the segment. We have featured NetEase, Inc. in our recent top 10 video gaming stocks to buy now. Mr. William Ding, CEO and Director of NetEase, highlighted the company’s other segments as well in their Q3 financial results:
“Our other businesses including Youdao, NetEase Cloud Music and Yanxuan are also on track, with promising year-over-year topline growth. As we work to bring even more value to our community and shareholders, we will continue to focus on expanding our sustainable growth prospects for each of our businesses.”
Co-Founder and Research Director at Insider Monkey
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