In this article, we will look at the 11 Most Undervalued High Quality Stocks to Buy According to Hedge Funds.
On July 15, Sevasti Balafas, CEO of GoalVest Advisory, joined CNBC Television for an interview. She believes that US exceptionalism remains intact, and investment and emphasis on AI infrastructure continue. The market is currently buoyed by the positive news from the President, which enables chipmakers to sell their products in China. Balafas notes that she is excited about the AI investment and infrastructure; however, she fears that the market is vulnerable at the same time.
Balafas elaborated that, while she remains bullish on the market overall, she also believes that the market is vulnerable. This is mainly because the stocks are expensive, trading at a forward P/E of 22 while the historic averages are at 17. Not only this, the market still has a moving target related to tariffs, with no estimation regarding its landing. She noted that although President Trump eases after talking tough, uncertainty remains regarding the tariffs.
With that, let’s take a look at the 11 most undervalued high-quality stocks to buy according to hedge funds.
A trader at a stock exchange, vigorously watching the stocks’ trends in the stock market.
Our Methodology
To curate the list of 11 most undervalued high-quality stocks to buy according to hedge funds, we used the iShares MSCI USA Quality Factor ETF. Using the ETF, we aggregated a list of undervalued stocks trading below the Average forward P/E ratio of the S&P 500, which is at 24.69 as per data from the Wall Street Journal. Next, we ranked these stocks based on the number of hedge fund holders sourced from Insider Monkey’s Q1 2025 database.
Why are we interested in 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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
11 Most Undervalued High Quality Stocks to Buy According to Hedge Funds
11. 3M Company (NYSE:MMM)
Forward P/E Ratio: 20.27
Number of Hedge Fund Holders: 69
3M Company (NYSE:MMM) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 9, Barclays raised the firm’s price target on 3M Company (NYSE:MMM) from $164 to $170, while keeping an Overweight rating on the stock.
The increased price target shows analysts’ improved sentiment around the company as it gets close to releasing its Q2 2025 earnings report. The firm noted that there are high investor expectations for companies in the multi-industry sector as they approach Q2 earnings reports. Many firms, including 3M Company (NYSE:MMM), are seen as well-positioned to beat current earnings estimates and possibly raise future guidance.
Moreover, the positive outlook comes despite soft consumer demand, highlighting the sector’s ability to navigate a muted demand environment. The company, during its fiscal Q1 2025 results, provided a full-year outlook. Management expects the Adjusted EPS to be in the range of $7.60 to $7.90, with an additional tariff sensitivity of $0.20 to $0.40 per share.
3M Company (NYSE:MMM) is a diversified technology and manufacturing company specializing in innovative products across multiple industries. Its operations span safety and industrial goods, transportation and electronics, and consumer products.
10. PepsiCo, Inc. (NASDAQ:PEP)
Forward P/E Ratio: 17.17
Number of Hedge Fund Holders: 71
PepsiCo, Inc. (NASDAQ:PEP) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 11, PepsiCo, Inc. (NASDAQ:PEP) announced a new limited-edition fashion collection with streetwear designer Samii Ryan. The collection is called Pepsi x Samii Ryan.
The partnership combines three big trends, including early 2000s nostalgia, bold rodeo-inspired styles, and the fun vibe of Pepsi’s Wild Cherry soda. The clothing line includes denim jackets, graphic t-shirts, sweatshirts, and accessories. Moreover, each item is designed in vibrant cherry red colors, featuring retro Pepsi logos and playful touches that blend fashion with flavor. The exclusive capsule is available online at Samii Ryan’s website and in select specialty stores.
PepsiCo, Inc. (NASDAQ:PEP) is a global company that makes and sells beverages and convenient foods. They own popular brands like Pepsi-Cola, Lay’s, Doritos, Gatorade, and Quaker.
9. QUALCOMM Incorporated (NASDAQ:QCOM)
Forward P/E Ratio: 13.38
Number of Hedge Fund Holders: 82
QUALCOMM Incorporated (NASDAQ:QCOM) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 9, QUALCOMM Incorporated (NASDAQ:QCOM) announced that its Snapdragon 8 Elite Mobile Platform will power the new Samsung Galaxy Z Fold7.
The platform features the latest Qualcomm Oryon CPU, which is claimed to be the world’s fastest mobile CPU. It also includes the advanced Hexagon NPU, which enhances the device’s AI capabilities. As a result of these technologies, the Galaxy Z Fold7 can deliver more powerful AI experiences than any previous foldable phone.
The Snapdragon 8 Elite was first seen in the Galaxy S25 series. Now, its special version for the Galaxy is coming to the Z Fold 7. This chip allows for advanced on-device AI, including understanding speech, images, and context.
QUALCOMM Incorporated (NASDAQ:QCOM) is a technology company that sells technologies related to wireless communication, including 3G, 4G, and 5G networks.
8. Applied Materials, Inc. (NASDAQ:AMAT)
Forward P/E Ratio: 20.82
Number of Hedge Fund Holders: 83
Applied Materials, Inc. (NASDAQ:AMAT) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 7, Citi raised the firm’s price target on Applied Materials, Inc. (NASDAQ:AMAT) from $190 to $220, while maintaining a Buy rating on the stock.
The firm also added the company to its US focus list, noting China’s agreement to restore rare earth magnets export licenses for six months, coupled with the US lifting countermeasures. The firm believes that this reduces the risk of a broader ban on semiconductor equipment, a key downside risk.
As a result, Citi increased estimates for the semiconductor equipment group, including Applied Materials, Inc. (NASDAQ:AMAT). The analysts noted that the company benefits from strong demand driven by artificial intelligence and advanced technologies like gate-all-around transistors, with sales expected to grow significantly.
Applied Materials, Inc. (NASDAQ:AMAT) is a technology company that provides equipment, software, and services to manufacture semiconductor chips and advanced displays.
7. The Coca-Cola Company (NYSE:KO)
Forward P/E Ratio: 23.55
Number of Hedge Fund Holders: 87
The Coca-Cola Company (NYSE:KO) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 8, Nik Modi from RBC Capital maintained a Buy rating on The Coca-Cola Company (NYSE:KO) with a price target of $76.
The bullish sentiment comes as the company gets close to releasing its second-quarter 2025 earnings results. During the fiscal first quarter of 2025, The Coca-Cola Company (NYSE:KO) grew its Global Unit Case Volume by 2% year-over-year. However, the net revenues declined 2% during the same time due to currency headwinds and the impact of re-franchising the bottling operations.
The company also provided a full-year and Q2 outlook. Management expects full-year organic revenue to grow between 5% to 6%. Whereas the currency headwinds are expected to continue in Q2, as management expects comparable net revenues to include an approximate 3% currency headwind.
The Coca-Cola Company (NYSE:KO) is a global beverage company that produces and sells a wide range of drinks.
6. The Procter & Gamble Company (NYSE:PG)
Forward P/E Ratio: 23.17
Number of Hedge Fund Holders: 88
The Procter & Gamble Company (NYSE:PG) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 14, Evercore ISI downgraded The Procter & Gamble Company (NYSE:PG) from Outperform to Market Perform, while also reducing the price target from $190 to $170.
The conservative outlook comes ahead of its Q4 earnings call, which is set to happen on July 29. The analyst expects The Procter & Gamble Company (NYSE:PG)’s fiscal 2026 organic sales growth to be between 1% and 3%, below the market consensus of 2.4%. This includes about a 50 basis point loss due to portfolio optimization rather than asset sales.
Moreover, the analyst also highlighted adverse shifts in retail channels, especially the growing consumer shift to Amazon, which now accounts for about 50% of growth in household and personal care products in the United States. This retail shift could limit the company’s sales growth below the 4% needed to drive operating leverage, constraining earnings growth.
The Procter & Gamble Company (NYSE:PG) is a multinational consumer goods company that manufactures and markets a wide range of household and personal care products.
5. Johnson & Johnson (NYSE:JNJ)
Forward P/E Ratio: 14.76
Number of Hedge Fund Holders: 91
Johnson & Johnson (NYSE:JNJ) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 10, Guggenheim analyst Vamil Divan maintained a Hold rating on Johnson & Johnson (NYSE:JNJ) with a price target of $164.
The cautious rating comes as the company gets close to releasing its Q2 2025 earnings results. The second quarter 2025 earnings call is scheduled for July 16. The company released its Q1 2025 results on April 15, where it grew its sales by around 2% year-over-year to $21.9 billion. Johnson & Johnson (NYSE:JNJ) achieved strong growth of nearly 6% in the US market, which helped to offset a struggling international market where it experienced a slowdown.
The main concern for the company remains from a 200% tariff risk by President Trump on Pharmaceuticals. The firm believes the company needs some initiatives aimed at moving away from the tariff risks to improve investor sentiment around the stock.
Johnson & Johnson (NYSE:JNJ) is a healthcare company that operates through two segments, including Innovative Medicine and MedTech.
4. Merck & Co., Inc. (NYSE:MRK)
Forward P/E Ratio: 9.41
Number of Hedge Fund Holders: 93
Merck & Co., Inc. (NYSE:MRK) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 10, Morgan Stanley analyst Terence Flynn lowered the firm’s price target on Merck & Co., Inc. (NYSE:MRK) from $99 to $98, while keeping a Hold rating on the stock.
This small reduction reflects a cautious outlook amid broader challenges facing large pharma companies this year. Flynn highlighted that the company, like its peers, has underperformed due to the challenging macroeconomic environment. He pointed out that ongoing policy uncertainties, including drug pricing reforms, tariffs, transfer pricing issues, and changes in FDA staffing, are adding complexity to the business climate.
Merck & Co., Inc. (NYSE:MRK) faced a 2% decrease in total worldwide sales during the fiscal first quarter of 2025. The company expects full-year sales to be between $64.1 billion and $65.6 billion.
Merck & Co., Inc. (NYSE:MRK) is a healthcare company that develops and sells prescription medicines, vaccines, and animal health products.
3. Adobe Inc. (NASDAQ:ADBE)
Forward P/E Ratio: 17.67
Number of Hedge Fund Holders: 111
Adobe Inc. (NASDAQ:ADBE) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 2nd, Mizuho Securities analyst Gregg Moskowitz reduced the firm’s price target from $530 to $280 while keeping a Sell Rating on the stock.
The bearish sentiment around the stock comes after Adobe Inc.’s (NASDAQ:ADBE) rival Figma filed its S-1 filing on July 1st. The IPO of Figma is seen as a threat to Adobe’s market share. According to Forbes, Figma delivered around $228.2 million in revenue for the first quarter of 2025, reflecting a 46% year-over-year growth. Notably, the net income tripled to 44.9 million, from $13.5 million in Q1 2024. Although this is significantly less compared to Adobe Inc.’s (NASDAQ:ADBE) $5.87 billion revenue and operating income of $2.11 billion as of Q2 2025, it still poses a threat to its market capitalization.
Adobe Inc. (NASDAQ:ADBE) is a global technology company that creates products and services enabling users to imagine, create, manage, and deliver digital content.
2. UnitedHealth Group Incorporated (NYSE:UNH)
Forward P/E Ratio: 13.9
Number of Hedge Fund Holders: 139
UnitedHealth Group Incorporated (NYSE:UNH) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 13, Morgan Stanley lowered the firm’s price target on UnitedHealth Group Incorporated (NYSE:UNH) from $374 to $324, while maintaining an Overweight rating on the stock.
The reduced price target comes as analysts believe that the new leadership will establish a conservative outlook for 2025 and 2026. The anticipated conservative outlook is due to the ongoing challenges with Optum and expected increases in investments. However, the analyst also foresees some recovery in Medicare Advantage margins by 2026, thereby keeping his Buy rating on the stock.
UnitedHealth Group Incorporated (NYSE:UNH) is a health care company that operates through two main business segments, including UnitedHealthcare and Optum.
1. Alphabet Inc. (NASDAQ:GOOGL)
Forward P/E Ratio: 18.75
Number of Hedge Fund Holders: 227
Alphabet Inc. (NASDAQ:GOOGL) is one of the Most Undervalued High Quality Stocks to Buy According to Hedge Funds. On July 11, Reuters reported that Alphabet Inc. (NASDAQ:GOOGL) has agreed to pay about $2.4 billion for a deal to license the technology of Windsurf, a startup specializing in AI coding tools.
This is seen as a major move by the company to enhance its artificial intelligence capabilities, specifically in AI-assisted coding. The deal follows the breakdown of a prior potential acquisition of Windsurf by OpenAI, which had offered $3 billion but ultimately did not close.
As part of the deal, Alphabet Inc. (NASDAQ:GOOGL) has hired Windsurf’s CEO Varun Mohan, co-founder Douglas Chen, and selected R&D team members to join Google’s DeepMind division. This team will focus on agentic coding projects, primarily working on Google’s Gemini AI initiative.
Alphabet Inc. (NASDAQ:GOOGL) is a holding company that owns Google and operates through three main segments, including Google Services, Google Cloud, and Other Bets.
While we acknowledge the potential of GOOGL to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an AI stock that is more promising than GOOGL and that has 100x upside potential, check out our report about this cheapest AI stock.
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