In this article we present the list of 10 Small-Cap Value Stocks Hedge Funds Love. Click to skip ahead and see the 5 Small-Cap Value Stocks Hedge Funds Love.
After more than a decade of being routinely crushed by growth stocks, value stocks are finally getting some love in 2022, as rampant inflation and fears of a recession have caused investors to unload their riskier growth stocks for added portfolio stability.
Value stocks are typically defined as stocks that have lower growth rates, but which in return often feature more attractive valuations in terms of price to sales, price to earnings, and price to book. Dividend value stocks also tend to boast much stronger yields than dividend growth stocks, given the heftier valuations in relation to their dividend paying power that the latter possess.
During the six-month period ended April 30, the MSCI World Value Index gained 33.2%, which the MSCI World Growth Index trailed by slighter more than 10 percentage points. The divide has been even greater in the U.S, where the Russell 1000 Value gained 36.3%, besting its growth counterpart by 12 percentage points.
While the current economic climate was certainly the catalyst for value stocks to make gains on growth stocks, there appeared to be a reckoning coming for growth stocks either way.
Research conducted by Cliff Asness’ AQR Capital Management showed the dispersion between growth and value stocks’ respective valuations actually eclipsed 2000’s dot-com bubble levels last year, and still hovers around the dot-com’s peak levels even after a correction this year. Asness described it as a “giant mispricing” and predicted that value stocks would make a great deal of money over the next three years.
With that in mind, let’s check out some of the top small-cap value stocks that leading money managers, including some of the most savvy value investors in the world, love the most.
The following data is gathered from hedge funds’ 13F filings data with the SEC. We follow hedge funds because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q1 2022 reporting period.
10 Small-Cap Value Stocks Hedge Funds Love
10. Travere Therapeutics, Inc. (NASDAQ:TVTX)
Number of Hedge Fund Shareholders: 29
Lyft, Inc. (NASDAQ:LYFT), Macy’s, Inc. (NYSE:M), and Tenet Healthcare Corp (NYSE:THC) are some of the most well-known small-cap value stocks that hedge funds love. A less heralded name is Travere Therapeutics, Inc. (NASDAQ:TVTX), which has enjoyed a 32% spike in hedge fund ownership over the past four quarters.
A rare diseases biopharmaceutical company, Travere Therapeutics, Inc. (NASDAQ:TVTX)’s leading candidate sparsentan is an investigational treatment for two rare kidney disorders that often lead to kidney failure. The FDA recently accepted Travere’s accelerated approval application for sparsentan’s use in one of those disorders.
Canaccord analyst Edward Nash believes sparsentan has the potential to become a blockbuster drug for Travere Therapeutics, Inc. (NASDAQ:TVTX) that could become the standard of care for both of the aforementioned disorders. He models for combined peak sales of $1.4 billion by 2032 and has a ‘Buy’ rating and $42 price target on TVTX shares.
9. Alaska Air Group, Inc. (NYSE:ALK)
Number of Hedge Fund Shareholders: 30
There’s been a 26% drop in the number of hedge funds long Alaska Air Group, Inc. (NYSE:ALK) over the past two quarters, but the stock nonetheless remains one of the most popular small-cap value plays among hedge funds. Ken Griffin’s Citadel Investment Group had the largest position in ALK at the end of March, consisting of 1.82 million shares valued at $106 million.
Alaska Air Group, Inc. (NYSE:ALK) is coming off one of its strongest quarters ever, flying at a record load factor of 88% during the period. June was also its best ever month, as it topped $1 billion in revenue during the final 30 days of Q2. All told, Alaska Air pulled in $2.66 billion during the quarter, while ex-items EPS was $2.19.
While Alaska Air Group, Inc. (NYSE:ALK) expects capacity for the current fiscal year to trail 2019 levels by about 8% to 9%, it nonetheless anticipates 15% to 17% greater CASMex compared to the last pre-pandemic year, alongside adjusted pre-tax margins of between 6% and 9%. During the second quarter, the latter figure was 14%, landing it near the top of the industry.
8. Affiliated Managers Group, Inc. (NYSE:AMG)
Number of Hedge Fund Shareholders: 31
Hedge fund ownership of Affiliated Managers Group, Inc. (NYSE:AMG) has remained remarkably steady over the past few quarters, as many funds appear content to hold on to their investments in fellow investment manager AMG. The company’s affiliate network includes several prominent hedge funds, Cliff Asness’ AQR Capital Management and Donald Yacktman’s Yacktman Asset Management among them.
Affiliated Managers Group, Inc. (NYSE:AMG)’s Q2 revenue came in at $604.1 million, while economic EPS was $4.03, both of which topped consensus estimates. Following the company’s Q2 results, Deutsche Bank analyst Brian Bedell raised his price target on AMG to $154 from $133 and kept a ‘Buy’ rating on the shares, citing the company’s differentiated position among asset managers and its willingness to spend excess capital on share repurchases as some of the firm’s positive traits.
Longleaf Partners Fund is bullish on Affiliated Managers Group, Inc. (NYSE:AMG)’s valuation given the hefty 30x EBITDA price tag on Baring Asia’s Q1 sale to EQT AB, as laid out in the fund’s Q1 2022 investor letter:
“AMG – In one of the bigger disconnects between stock price performance and appraisal value growth, AMG declined in line with a generic US money manager, correlating to the S&P 500. AMG’s reality is much more compelling, given its managers are a diversified mix of US and Global public equities, private equity, wealth management, and fund-of-funds. Our appraisal grew strongly in the quarter as private equity affiliate Baring Asia sold for 30xEBITDA (earnings before interest, taxes, depreciation and amortization) or mid-teens expected 2023 earnings (more than double where AMG is valued today) for a combination of cash and EQT AB shares.”
7. Brookdale Senior Living, Inc. (NYSE:BKD)
Number of Hedge Fund Shareholders: 32
Brookdale Senior Living, Inc. (NYSE:BKD) has half the hedge fund ownership it did throughout parts of 2014 and 2015, but remains a popular value stock to this day. Larry Robbins’ Glenview Capital and James E. Flynn’s Deerfield Management are two of the company’s biggest shareholders, owning 12.6 million and 5.38 million shares respectively.
Brookdale Senior Living, Inc. (NYSE:BKD), which operates upper scale retirement centers, had consolidated occupancy of 75.2% in June, including 76.6% at month’s end. Its weighted average occupancy was up by 4.1 percentage points year-over-year during Q2, its strongest annual growth rate in more than a decade.
Brookdale Senior Living, Inc. (NYSE:BKD) trades at 0.33x sales and 1.50x book value, about par for the course in terms of its five-year averages. Its price/cash flow ratio is now more than double that average however, at 16.57x. After generating $19.8 million in free cash flow during 2020, the company lost $271 million on that front a year later.
6. Revlon, Inc. (NYSE:REV)
Number of Hedge Fund Shareholders: 36
Closing out the first half of the list is Revlon, Inc. (NYSE:REV), which hedge funds have been bullish on, but which recently filed for Chapter 11 bankruptcy protection. As one of the 5 Most Shorted Stocks to Watch in July, there is immense pressure and pessimism surrounding Revlon’s comeback bid and its shares’ ultimate value. Short interest in Revlon hit a record 105% in the middle of July.
In its bankruptcy filings, Revlon, Inc. (NYSE:REV) cited its $3.5 billion debt load as leaving it unable to meet its payment obligations to critical suppliers. Revlon earned approval for a loan of up to $1.4 billion during the bankruptcy proceedings, with the company committing to exit bankruptcy by next April.
Revlon shares shot up over 300% in late June, just days after it filed for bankruptcy, after it was reported that Indian billionaire Mukesh Ambani’s Reliance Industries was considering buying the struggling company. Reliance has not commented on the report.
The Mittleman Global Value Equity Fund liked the rebound it was seeing in Revlon, Inc. (NYSE:REV)’s business, as detailed in its Q1 2022 investor letter:
“For Revlon, given very recent reports by analysts on the extent to which a slowdown in China, higher input costs, and rising interest rates might impact it, MIM provides additional commentary herewith to supplement the update in WWOAW. Revlon’s business is rebounding from the pandemic, despite its stock price continued insistence to the contrary. Sales were +9% in 2021 to $2.08B, adjusted EBITDA +22% to $293M (14.1% EBITDA) margin, gross margin improved to 59.4% from 57.1%. MIM sees the sales rebound accelerating in 2022, estimating +15% to $2.4B (the 2019 pre-pandemic level), and EBITDA at $350M (14.5% EBITDA margin) vs. 12-year average adjusted EBITDA margin of 16.5% (2008-2019) before COVID crushed 2020. The Revlon brand itself performed much better in Q4 2021 (consumption at retail) than the wholesale numbers they reported (Revlon’s sales to its customers, hindered by supply chain disruption) would imply…” (Click here to see the full text)
Lyft, Inc. (NASDAQ:LYFT), Macy’s, Inc. (NYSE:M), and Tenet Healthcare Corp (NYSE:THC) feature on the second part of this list. Which stock is the most popular small-cap value play among hedge funds? Head on over to find out.
Click to continue reading and see the 5 Small-Cap Value Stocks Hedge Funds Love.
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Disclosure: None. 10 Small-Cap Value Stocks Hedge Funds Love is originally published at Insider Monkey.