In this article, we will take a look at the 12 most undervalued dow stocks to buy according to hedge funds.
The stock market bloodbath that started in 2022 has forced investors to shun the so-called growth companies that have nothing to show in terms of cash or tangible short-term value. That’s because investors tend to flee risky assets towards safe, value plays that can offer them safety and a refuge from volatility during difficult times. Value underperformed growth from 2007 until 2020. But the era of growth dominance seems to have ended. In a report titled Value vs. Growth Investing: Value returns with a Vengeance, JPMorgan analysts said that from 2007 through 2020 value underperformed in all sectors and asset classes. This underperformance reached its peak in 2020. The report said that as the world moved online after the pandemic, innovation and growth saw a lot of traction. The report highlights that this was the time when the markets made the same mistake as they did during the “TMT bubble” by “boosting future normalized growth rates”.
The JPMorgan report says that by the end of 2020, “expectations became divorced from reality” as many software and growth companies’ valuations touched unprecedented highs.
The report mentioned Tesla, Facebook and other growth companies as examples of huge valuations that were not connected with reality.
“Amazon and Microsoft are undoubtedly great companies, but if you had bought them at the height of the TMT bubble in December 1999, it would have taken 10 years and 15 years, respectively, to break even. Valuation – no matter how good the company is – matters, even in the long term.”
JPMorgan analysts believe value has been out of fashion for so long that many investors today aren’t used to a value-led market and they are only accustomed to small market rallies that last “only six to nine months.”
“All of this indicates that we are in for a reckoning that has only just begun.”
Photo by Ruben Sukatendel on Unsplash
Our Methodology
For this article, we scanned the Dow 30 group of companies and picked the stocks that have a PE ratio of under 20 as of February 10. From these companies we chose 12 companies that have the highest number of hedge fund investors. We gauged that metric using Insider Monkey’s proprietary database of 920 elite hedge funds’ holdings, as of the end of the third quarter of 2022. The list is ranked in ascending order of the number of hedge fund investors in these companies.
Most Undervalued Dow Stocks To Buy According To Hedge Funds
12. Caterpillar Inc. (NYSE:CAT)
Number of Hedge Fund Holders: 43
Caterpillar Inc. (NYSE:CAT) is in the limelight after the company posted Q4 results. Caterpillar Inc. (NYSE:CAT)’s adjusted EPS in the quarter came in at $3.86, missing estimates by $0.17. Revenue in the period jumped 20.3% to reach $16.6 billion, beating estimates by $760 million. Caterpillar Inc. (NYSE:CAT)’s operating cash flow came in at $7.8 billion.
One of the key reasons Caterpillar Inc. (NYSE:CAT) has been famous among hedge funds and analysts is the company’s strong dividend history. Caterpillar Inc. (NYSE:CAT) has increased its dividends consistently for close to three decades now. In 2022, Caterpillar Inc. (NYSE:CAT) returned $6.7 billion to shareholders through share repurchases and dividends. Bill & Melinda Gates Foundation Trust reported owning a $1.21 billion stake in Caterpillar Inc. (NYSE:CAT) at the end of September 2022.
11. 3M Company (NYSE:MMM)
Number of Hedge Fund Holders: 49
Of the 920 hedge funds in Insider Monkey’s proprietary database, 49 hedge funds have stakes in 3M Company (NYSE:MMM) as of the end of the third quarter of 2022. The total worth of these stakes was about $1.5 billion. Earlier in February, 3M Company (NYSE:MMM) announced a 0.7% increase in its quarterly dividend.
Recently, The Wall Street Journal reported that Bert Flossbach, co-founder and senior portfolio manager of mutual-fund firm Flossbach von Storch, has expressed his lack of confidence in 3M Company (NYSE:MMM) CEO Mike Roman. Flossbach believes 3M Company (NYSE:MMM)’s revenue hasn’t been up to the mark since Roman took the job in 2018.
10. Amgen Inc. (NASDAQ:AMGN)
Number of Hedge Fund Holders: 53
Amgen Inc. (NASDAQ:AMGN) shares have lost about 8% year to date through February 9. Amgen Inc. (NASDAQ:AMGN)’s PE ratio stands at 19.79. Amgen Inc. (NASDAQ:AMGN) recently posted Q4 results. Adjusted EPS of Amgen Inc. (NASDAQ:AMGN) in the fourth quarter came in at $4.09, meeting estimates. Revenue in the quarter totaled $6.8 billion, beating estimates by $30 million. Amgen Inc. (NASDAQ:AMGN) said its fourth-quarter revenues were helped by a 4% increase in product sales.
Earlier in February, the US FDA approved self-administration option of Amgen Inc. (NASDAQ:AMGN) and AstraZeneca’s (NASDAQ:AZN) asthma therapy Tezspire.
As of the end of the third quarter of 2022, 53 hedge funds tracked by Insider Monkey reported owning shares in Amgen Inc. (NASDAQ:AMGN). The biggest stakeholder of Amgen Inc. (NASDAQ:AMGN) during this period was John Overdeck and David Siegel’s Two Sigma Advisors which owns a $379 million stake in the company.
9. Verizon Communications Inc. (NYSE:VZ)
Number of Hedge Fund Holders: 62
Telecom giant Verizon Communications Inc. (NYSE:VZ) ranks 9th in our list of the most undervalued Dow stocks to buy according to hedge funds. Recently, Verizon Communications Inc. (NYSE:VZ) posted fourth quarter results. Verizon Communications Inc. (NYSE:VZ)’s adjusted EPS in the quarter came in at $1.19, in-line with consensus estimates. Revenue in the period jumped 3.5% on a YoY basis to reach $35.3 billion, beating estimates by $160 million.
In January, Citi analyst Michael Rollins increased the price target of Verizon Communications Inc. (NYSE:VZ) to $42 from $39. The analyst said that the guidance range for EBITDA in 2023 seems “reasonable.”
A total of 62 hedge funds tracked by Insider Monkey reported having stakes in Verizon Communications Inc. (NYSE:VZ) as of the end of the third quarter of 2022. The total value of these stakes was $1.4 billion.
8. Chevron Corporation (NYSE:CVX)
Number of Hedge Fund Holders: 66
Oil giant Chevron Corporation (NYSE:CVX) is one of the most undervalued Dow stocks to buy according to hedge funds. While Chevron Corporation (NYSE:CVX) has gained about 22% over the past 12 months, its PE ratio stands at about 9 as of February 9.
For the fourth quarter of 2022, Chevron Corporation (NYSE:CVX)’s adjusted EPS was $4.09, missing estimates by $0.20. Revenue in the quarter jumped by 17.3% to total $56.47 billion, beating estimates by $2.5 billion.
A total of 66 hedge funds tracked by Insider Monkey reported owning shares of Chevron Corporation (NYSE:CVX) at the end of the third quarter of 2022, up from 59 funds in the previous quarter. The biggest stakeholder of Chevron Corporation (NYSE:CVX) at the end of September 2022 was Warren Buffett’s Berkshire Hathaway.
Madison Funds made the following comment about Chevron Corporation (NYSE:CVX) in its fourth quarter 2022 investor letter:
“This quarter we are highlighting Chevron Corporation (NYSE:CVX) as a relative yield example in the Energy sector. CVX is a leading integrated oil company with exploration, production, and refining operations. It is the second largest oil company in the United States with more than 70% of production volumes from oil and liquid-linked natural gas. We believe it has a sustainable competitive advantage due to its scale and low-cost position. It has a large acreage position in the Permian Basin, which is a high-quality oil field. CVX was an early mover in the Permian and did not overpay to enter the oilfield; 75% of its position has a no or low royalty rate, which gives it a cost advantage over competitors.
Our thesis is that free cash flow growth per share is expected to accelerate due to disciplined capital spending, rising Permian production volumes, and stock repurchases. The company has also made important investments in low-carbon areas like greenhouse gas reduction, carbon capture, hydrogen, and renewable fuels which we believe will pay off later in the decade as the world transitions more to renewable energy sources…” (Click here to read the full text)
7. American Express Company (NYSE:AXP)
Number of Hedge Fund Holders: 68
American Express Company (NYSE:AXP) ranks 7th in our list of the most undervalued Dow stocks to buy according to hedge funds. Recently, Morgan Stanley analysts led by Betsy Graseck upgraded American Express Company (NYSE:AXP) to Overweight from Equal-weight, citing higher credit quality, sustainable revenue growth, and positive operating leverage. Morgan Stanley said in a note that American Express Company (NYSE:AXP) has lower risk credit skew as its card members have higher FICO scores. The firm expects American Express Company (NYSE:AXP)’s credit losses meeting pre-COVID levels by 2024, and it believes “all other card peers will overshoot on deterioration.”
A total of 68 hedge funds tracked by Insider Monkey reported owning shares in American Express Company (NYSE:AXP) as of the end of the third quarter of 2022.
6. Cisco Systems, Inc. (NASDAQ:CSCO)
Number of Hedge Fund Holders: 68
Cisco Systems, Inc. (NASDAQ:CSCO) remains one of the top stock picks of hedge funds and analysts alike as the company is a key player in high-growth markets like 5G, IoT, networking and software. Recently, Bank of America analyst Anthony Cassamassino gave a Buy rating for Cisco Systems, Inc. (NASDAQ:CSCO) shares, saying that the company is “ahead of product cycles that span +35% of product revenues, including 400G, 5G, WiFi 6, and 400ZR/Optical.”
The analyst also sees comps improving for Cisco Systems, Inc. (NASDAQ:CSCO), which he thinks would provide tailwinds for revenue. The analyst has a $52 price target for Cisco Systems, Inc. (NASDAQ:CSCO) shares.
A total of 68 hedge funds tracked by Insider Monkey reported owning shares of Cisco Systems, Inc. (NASDAQ:CSCO) as of the end of the third quarter of 2022.
5. The Goldman Sachs Group, Inc. (NYSE:GS)
Number of Hedge Fund Holders: 69
The Goldman Sachs Group, Inc. (NYSE:GS) ranks 5th in our list of the most undervalued Dow stocks to buy according to hedge funds. As of the end of the third quarter of 2022, 69 hedge funds tracked by Insider Monkey reported having stakes in The Goldman Sachs Group, Inc. (NYSE:GS). The total value of these stakes was about $4.6 billion. The biggest stakeholder of The Goldman Sachs Group, Inc. (NYSE:GS) during this period was Ken Fisher’s Fisher Asset Management which owns a $1.4 billion stake in the firm.
4. Intel Corporation (NASDAQ:INTC)
Number of Hedge Fund Holders: 69
Intel Corporation (NASDAQ:INTC) has shed about 5% over the past 30 days as the company posted a quarterly report and posted guidance that surprised many. Intel Corporation (NASDAQ:INTC)’s short-term outlook does not look good and some analysts are questioning the safety of Intel’s dividend. However, Intel Corporation (NASDAQ:INTC) could be a decent option for long-term investors as sooner or later the headwinds faced by the company due to the broader market’s downturn are expected to fade. Intel Corporation (NASDAQ:INTC) is after all one of the market leaders that is set to gain due to its presence in the semiconductor market for AI, gaming and other applications.
A total of 69 hedge funds tracked by Insider Monkey reported having stakes in Intel Corporation (NASDAQ:INTC) at the end of the third quarter of 2022.
ClearBridge Investments made the following comment about Intel Corporation (NASDAQ:INTC) in its Q3 2022 investor letter:
“Also on the detractor side, Intel Corporation (NASDAQ:INTC) delivered a disappointing revenue miss and lowered full-year revenue and earnings guidance as COVID-19-driven demand for PCs abated (where Intel enjoys half its sales) and a delay in its flagship Sapphire Rapids CPU hurt its data center business. Despite these issues, we still believe Intel is an economically sensitive turnaround story with substantial upside.”
3. Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Holders: 82
Merck & Co., Inc. (NYSE:MRK) is not only a strong pharma stock with long-term growth potential, it is also a solid dividend payer, with over a decade of consistent dividend increases. Recently, Merck & Co., Inc. (NYSE:MRK) said its famous drug Keytruda, with chemotherapy, met the primary goal of progression free survival (PFS) in patients with a type of cancer of the uterus in a phase 3 trial.
Of the 920 hedge funds tracked by Insider Monkey at the end of the third quarter of 2022, 82 funds reported owning stakes in Merck & Co., Inc. (NYSE:MRK). The biggest stakeholder of Merck & Co., Inc. (NYSE:MRK) during the period was Ken Fisher’s Fisher Asset Management which owns a $1 billion stake in the firm.
Baron Funds made the following comment about Merck & Co., Inc. (NYSE:MRK) in its Q4 2022 investor letter:
“Merck & Co., Inc. (NYSE:MRK) is a large-cap pharmaceutical company with a deep heritage in drug discovery. Share gains were led by the continued growth of key asset Keytruda, the leading immune oncology agent used to treat a variety of cancers. Shares also benefited from increased investor interest as Merck proves its ability to scale its Gardasil vaccine that had previously been constrained by supply issues. We retain long-term conviction, as we expect Keytruda to solidify its position as the best-selling biopharmaceutical drug of all time.”
2. The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Holders: 89
The Home Depot, Inc. (NYSE:HD) ranks second in our list of the most undervalued Dow stocks to buy according to hedge funds. The Home Depot, Inc. (NYSE:HD) shares gained on January 18 after a December 2022 NAHB Housing Market Index showed a jump. The Home Depot, Inc. (NYSE:HD) shares are poised to gain even when the housing market is slow. When people aren’t buying new homes, they spend renovating their existing homes. This home improvement trend brings more sales for home improvement companies like The Home Depot, Inc. (NYSE:HD).
Matrix Asset Advisors made the following comment about The Home Depot, Inc. (NYSE:HD) in its Q3 2022 investor letter:
“During the quarter, we re-established a position in The Home Depot, Inc. (NYSE:HD) sold earlier this year, after the shares declined sharply on big picture concerns about a softer housing market and lower consumer spending. We believe that HD is a very well-managed company, positioned to continue showing good profits even as the economy decelerates. The products it carries in inventory are in year-round demand from contractors and homeowners wanting to maintain and improve their homes. The company has historically been shareholder friendly, repurchasing shares and increasing the dividend, most recently by 15% earlier this year. On September 30, HD’s current dividend yield was 2.8%.”
1. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 110
JPMorgan Chase & Co. (NYSE:JPM) is one of the biggest banks in the world. JPMorgan Chase & Co. (NYSE:JPM) is a hedge fund favorite, as Insider Monkey’s database of 920 hedge funds shows that 110 hedge funds had stakes in the company as of the end of the third quarter of 2022. The total value of these stakes was $6.4 billion. The biggest stakeholder of the bank during this period was Ken Fisher’s Fisher Asset Management which owns an $821 million stake in JPMorgan Chase & Co. (NYSE:JPM).
JPMorgan Chase & Co. (NYSE:JPM)’s Q4 results were better than expected, though the stock fell after the company said it plans to spend more in 2023 than it did in 2022. For fiscal 2023, total net interest income is expected to come in at about $73 billion.
Here is what Vltava Fund has to say about JPMorgan Chase & Co. (NYSE:JPM) in its Q3 2022 investor letter:
“We regard JPM to be the strongest and best- managed bank in the world. It is a leader in investment banking, commercial banking, credit cards, and asset management. Its size (the largest bank in the USA, with nearly USD 4,000 billion in assets) and diversification give it a strong competitive advantage that is compounded by its cost advantages and the high costs to clients associated with switching banks. JPM’s management prides itself on running the only large bank to avoid major instability over the long term.
JP Morgan’s quality and strength first became fully evident in 2008 under the leadership of its CEO Jamie Dimon. Not only did JP Morgan help to stabilize the market by taking over the failing Bear Stearns in the spring of that year, but throughout the Great Financial Crisis it was the only big US bank that did not require government assistance and it was highly profitable even in the difficult year of 2008.
A well-functioning and efficient bank can be a very good long-term investment, because the interest compounding effect works well here. JPM’s return on equity (ROE) is well into the double digits and this puts it in a good position to continue producing better long-term returns than does the market. JPM has been very profitable even during years when interest rates were close to zero. The current – and perhaps not temporary – return to somewhat more normal, higher interest rates should have a significantly positive impact on the bank’s interest income and overall profitability.”
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Disclosure: None. 12 Most Undervalued Dow Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.
