10 Undervalued Stocks Hedge Funds Are Talking About

The financial markets started looking beyond the effects of the coronavirus pandemic in 2022 and inflation and Fed’s interest rates policy took the center stage. S&P 500 Index is down nearly 6% and NASDAQ 100 is down more than 10% so far in 2022, however, especially technology stocks with high growth rates experienced larger losses than the rest of the market. We are now in a stock picker’s market. Insider Monkey has been reviewing several investor letters from hedge funds and prominent investors to identify the pockets of the stock market where the smart money is focusing on right now. You can check out letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page. In this article we will bring 10 stocks that are recently mentioned in these investor letters to your attention.

10. Snap Inc. (NYSE: SNAP)

RiverPark Funds, an investment management firm, published its “RiverPark Large Growth Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. The RiverPark Large Growth Fund (the “Fund”) returned -3.23% for the third quarter of 2021, while its benchmarks, the S&P 500 Total Return Index (“S&P”) advanced 0.58%, the Russell 1000 Growth Total Return Index (“RLG”) returned 1.16%, while the Morningstar Large Growth Category returned -0.07%. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

RiverPark Large Growth Fund, in its Q4 2021 investor letter, mentioned Snap Inc. (NYSE: SNAP) and discussed its stance on the firm. Snap Inc. is a Santa Monica, California-based camera and social media company with a $62.6 billion market capitalization. SNAP delivered a -17.27% return since the beginning of the year, while its 12-month returns are down by -38.86%. The stock closed at $38.91 per share on February 4, 2022.

Here is what RiverPark Large Growth Fund has to say about Snap Inc. in its Q4 2021 investor letter:

“Snap: Similar to TWTR and PINS, Snap shares were under pressure to end the year, as the company guided fourth quarter revenue growth down to 28%-32%, well below its 57% 3Q growth. The slowing growth is a result of both Apple’s App Tracking Transparency (known as ATT) change, giving users the choice not to be tracked across apps and websites, hindering adeffectiveness measurement, plus supply chain disruptions causing retailers to scale back their advertising. We believe these headwinds are transitory and that next year Snap will return to its long-term growth target of 50%+ growth.

The company reported revenue growth of 57% for its 3Q to $1 billion, driven by user growth of 23%, and 28% growth in average revenue per user (ARPU). Adjusted EBITDA improved by $118 million year over year to $174 million, for a 16% margin. Snap also continues to roll-out products that should help drive further expansion in user growth and ARPU. For example, five of the company’s new augmented reality Lenses generated more than 1 billion impressions each, achieving over 11 billion impressions in total. With TTM of $3.7 billion in revenue and an ARPU that is about 1/3 that of Facebook, we believe Snap has a long runway for both revenue growth and expanded profitability as it improves its platform functionality, grows its audience, and continues to advance its monetization.”

Our calculations show that Snap Inc. (NYSE: SNAP) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. SNAP was in 78 hedge fund portfolios at the end of the third quarter of 2021, compared to 64 funds in the previous quarter. Snap Inc. (NYSE: SNAP) delivered a -26.82% return in the past 3 months. In November 2021, we also shared another hedge fund’s views on SNAP in another article. 

9. CVS Health Corporation (CVS)

Madison Funds, in its Q4 2021 investor letter, mentioned CVS Health Corporation (NYSE: CVS) and discussed its stance on the firm. CVS Health Corporation is a Woonsocket, Rhode Island-based pharmacy company with a $143.5 billion market capitalization. CVS delivered a 5.39% return since the beginning of the year, while its 12-month returns are up by 48.93%. The stock closed at $108.72 per share on February 3, 2022.

Here is what Madison Funds has to say about CVS Health Corporation in its Q4 2021 investor letter:

“This quarter we are highlighting CVS Health (CVS) as a relative yield example in the Health Care sector. CVS is a vertically integrated health care focused company with leading pharmacy, pharmacy benefits manager (PBM) and managed care businesses. It has more than 10,000 retail pharmacies, along with strong franchises that were acquired in recent years including Caremark, which is the largest PBM in the US that processes over 2 billion adjusted claims annually, and Aetna with 24 million health insurance members. We believe its retail pharmacy network, along with its size and scope in the PBM and managed care businesses provide sustainable competitive advantages.

Our thesis on CVS is that its vertically integrated business model will successfully reduce health care costs for its clients while also accelerating long-term earnings growth. CVS management believes that when retail customers use both CVS pharmacy benefits and medical insurance, their medical costs decline 3-6% over a three-year period by reducing hospitalizations and emergency room visits. This cost savings should help retain and grow clients while lowering health care costs.

CVS stock significantly lagged the stock market since 2015 as the company changed its strategy from a pure retail outfit and made the transformative Caremark and Aetna acquisitions. After several years, we believe integration of those companies is finally starting to pay off and its stock performance is improving. The company raised earnings guidance earlier this year, while also committing to return significant amounts of capital to shareholders through dividend increases and stock buybacks. At its recent investor day, CVS announced a +10% increase in its dividend and a $10 billion stock repurchase authorization, which represents 7% of diluted shares outstanding. Management also targeted sustainable long-term earnings growth of greater than +10% beginning in 2024…” (Click here to see the full text)

Our calculations show that CVS Health Corporation (NYSE: CVS) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. CVS was in 61 hedge fund portfolios at the end of the third quarter of 2021, compared to 67 funds in the previous quarter. CVS Health Corporation (NYSE: CVS) delivered a 15.06% return in the past 3 months. In October 2021, we also shared another hedge fund’s views on CVS in another article.

8. Salesforce.com Inc. (CRM)

Palm Capital, in its Q4 2021 investor letter, mentioned salesforce.com, inc. (NYSE: CRM) and discussed its stance on the firm. salesforce.com, inc. is a San Francisco, California-based software company with a $221.6 billion market capitalization. CRM delivered a -16.28% return since the beginning of the year, while its 12-month returns are down by -10.59%. The stock closed at $212.77 per share on February 3, 2022.

Here is what Palm Capital has to say about salesforce.com, inc. in its Q4 2021 investor letter:

“Identifying the power of the internet to vastly improve the delivery of software to customers, current CEO, Marc Benioff, founded Salesforce in 1999. The company’s initial product – Customer Relationship Management (CRM) software – wasn’t very different from that of the well-established incumbents. But delivering it over the internet resulted in a much better user experience.

It removed the high upfront costs of purchasing software packages as well as expensive upgrade exercises. It also eliminated the complex task of installing the software for customers – a process that could take years in large enterprises. It created predictability in their expenses and ensured their software was always up to date. And it allowed them to access the software from any location and any device that had an internet connection.

Salesforce quickly ate up market share. It was a pioneering idea that has since been copied by most software companies globally.

Software is an industry where a provider’s sustainable advantage is the prohibitive cost and risk a customer incurs to move to a competitor. Customers don’t take a decision to change providers lightly. As a result, retention rates on critical software are typically very high.

Distribution is crucial in building this advantage…” (Click here to see the full text)

Our calculations show that salesforce.com, inc. (NYSE: CRM) ranks 11th on our list of the 30 Most Popular Stocks Among Hedge Funds. CRM was in 119 hedge fund portfolios at the end of the third quarter of 2021, compared to 108 funds in the previous quarter. salesforce.com, inc. (NYSE: CRM) delivered a -30.93% return in the past 3 months. In January 2022, we also shared another hedge fund’s views on CRM in another article.

7. Alphabet Inc. (GOOG)

Weitz Investment Management, in its Q4 2021 investor letter, mentioned Alphabet Inc. (NASDAQ: GOOG) and discussed its stance on the firm. Alphabet Inc. is a Mountain View, California-based multinational technology conglomerate holding company with a $1.8 trillion market capitalization. GOOG delivered a -6.21% return since the beginning of the year, while its 12-month returns are up by 42.74%. The stock closed at $2,713.97 per share on January 31, 2022.

Here is what Weitz Investment Management has to say about Alphabet Inc. in its Q4 2021 investor letter:

Google parent Alphabet was the Fund’s top contributor for 2021, gracing the Fund’s top-contributor list in all four quarters. Alphabet shares rose 65% in 2021, while its earnings appeared on track to double. Even after these gains, we believe the stock continues to trade at a discount.

Our calculations show that Alphabet Inc. (NASDAQ: GOOG) ranks 5th on our list of the 30 Most Popular Stocks Among Hedge Funds. GOOG was in 156 hedge fund portfolios at the end of the third quarter of 2021, compared to 155 funds in the previous quarter. Alphabet Inc. (NASDAQ: GOOG) delivered a -5.62% return in the past 3 months. In December 2021, we also shared another hedge fund’s views on GOOG in another article.

6. Pinterest, Inc. (PINS)

RiverPark Large Growth Fund, in its Q4 2021 investor letter, mentioned Pinterest, Inc. (NYSE: PINS) and discussed its stance on the firm. Pinterest, Inc. is a San Francisco, California-based technology company with a $17.7 billion market capitalization. PINS delivered a -25.03% return since the beginning of the year, while its 12-month returns are down by -66.75%. The stock closed at $27.25 per share on February 4, 2022.

Here is what RiverPark Large Growth Fund has to say about Pinterest, Inc. in its Q4 2021 investor letter:

“Pinterest: PINS stock was under pressure in 2021 due to sequential quarterly decreases in Monthly Average Users (MAUs), supply-chain disruptions affecting CPG ad spend, and questions regarding PayPal exploring an acquisition of Pinterest (which initially drove the stock higher but resulted in a steep sell off after PYPL announced that talks were not active). For the most recent quarter, the company’s MAUs were up 1% year-over-year, but declined 2% sequentially due to the pandemic starting to lift and Gen-Z returning to campus (and engaging less). PINS still posted exceptional revenue growth of 43%, fueled by 37% ARPU growth. Pinterest also posted high incremental margins, as adjusted EBITDA grew to $201 million for a 32% margin, up 117% year over year.

Along with our other social media advertising holdings, SNAP, TWTR and FB, we believe Pinterest to be an extremely well-positioned internet advertising platform. Users are increasingly coming to Pinterest to get inspiration for their home, their style or upcoming travel, which often means they are actively looking for products and services to buy. The company currently has 444 million MAU’s, 2/3 of whom are female (who continue to control the lion’s share of household purchasing budgets), which positions the company well to continue to take share of future ad dollar allocations. In addition, PINS’ 3Q ARPU was only $1.41, significantly less than SNAP’s $3.49, and Facebook’s $10. Increasing ARPU by continuing to close the ARPU gap with its peers while expanding user engagement should drive a minimum of 30% annual revenue growth over the next few years; additionally, we expect expanding gross margins (from 80% in the third quarter, which was up 500 bps year over year) will lead to improved adjusted EBITDA margins (from 32% last quarter).”

Our calculations show that Pinterest, Inc. (NYSE: PINS) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. PINS was in 58 hedge fund portfolios at the end of the third quarter of 2021, compared to 63 funds in the previous quarter. Pinterest, Inc. (NYSE: PINS) delivered a -41.04% return in the past 3 months. In January 2022, we also shared another hedge fund’s views on PINS in another article.

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Disclosure: None. 10 Undervalued Stocks Hedge Funds Are Talking About is originally published at Insider Monkey.