Increasing volatility and uncertainty in the financial markers caused by rising interest rates, geopolitical risks and the generative AI revolution has made it difficult for value investors to know the true value of businesses they want to invest in. With buzzwords like AI, automation, big data and Cloud becoming ubiquitous, the market’s focus seems to have shifted entirely on the future, which is why investors are often ready to pile into stocks trading at sky-high valuations.

Value Investing in an Uncertain World According to Billionaire Bill Ackman

Activist investor and billionaire Bill Ackman earlier this month sat down for a fireside chat at UBS and talked about the recent state of value investing in an uncertain world. Ackman said that one of the hardest things in investing is not building a financial model, but to predict the durability of a business.

Answering a question about using AI to analyze financial markets and invest in stocks — especially in the context of J.P. Morgan’s IndexGPT — Ackman said that it might or might not work, and even if it works for a few months or years, it won’t give us any guarantee it’d keep working in the long run.

Despite these uncertainties, value stocks are still relevant and many value investors, while acknowledging the tough value investing landscape, keep beating the market. David Einhorn of Greenlight Capital is a case in point. Einhorn has repeatedly talked about how the traditional value investing models aren’t working anymore.

In an interview in October 2022, Einhorn sounded skeptical about the future of value investing despite the fact that he’s a famous value investor. Einhorn believes the world has become “passive” and value investors are going “out of business” because there is “nobody to notice” the true value of stocks. Einhorn said that there was a time when value investors used to spot stocks based on valuation multiples and other traditional metrics and sell them when these stocks gained their true potential. But Einhorn believes now that era is coming to an end.

And yet Einhorn’s fund returned 37% in 2022 and 22% last year.

Methodology

In this backdrop, we decided to take a look at some undervalued penny stocks hedge funds are buying this year. For this article we first used a stock screener to list down all penny stocks with P/E ratios less than 20. From these stocks we chose 10 companies with the highest number of hedge fund investors. 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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

12. Ambev SA (NYSE:ABEV)

Number of Hedge Fund Investors: 13

P/E Ratio: 12.9

Brazil-based brewer Ambev SA (NYSE:ABEV) ranks 12th in our list of the undervalued penny stocks to buy now. During the first quarter, Ambev SA (NYSE:ABEV) earned R$0.23 per share, while its revenue fell 1.2% to R$20.28 billion. The stock has a PE ratio of about 12.9 as of May 8.

11. Sachem Capital Corp (NYSE:SACH)

Number of Hedge Fund Investors: 11

P/E Ratio: 11.51

Real estate finance company Sachem Capital Corp (NYSE:SACH) has a dividend yield of about 13% and a PE ratio of 11.50. Last month Sachem Capital Corp (NYSE:SACH) posted full-year results. GAAP EPS in the period came in at $0.27, missing estimates by $0.20. Revenue jumped about 26% year over year to $65.6 million, beating estimates by $1.28 million.

As of the end of the last quarter of 2023, 11 hedge funds tracked by Insider Monkey had stakes in Sachem Capital Corp (NYSE:SACH).

10. Rimini Street Inc (NASDAQ:RMNI)

Number of Hedge Fund Investors: 15

P/E Ratio: 9.97

Enterprise software company Rimini Street Inc (NASDAQ:RMNI) is one of the most undervalued penny stocks to buy now. As of May 8 the enterprise software company’s PE ratio is 9.91. Earlier this month Rimini Street Inc (NASDAQ:RMNI) posted first quarter results. GAAP EPS in the quarter came in at $0.01, missing estimates by $0.05. Revenue jumped 1.1% year over year to $106 million, beating estimates by $0.49 million.

Of the 933 funds in Insider Monkey’s database, 15 hedge funds had stakes in Rimini Street Inc (NASDAQ:RMNI).

Diamond Hill Small Cap Fund made the following comment about Rimini Street, Inc. (NASDAQ:RMNI) in its Q3 2023 investor letter:

“Other bottom contributors in Q3 included Rimini Street, Inc. (NASDAQ:RMNI), Lancaster Colony Corporation and Allegiant Travel Company. Shares of IT services company Rimini Street declined following a litigation ruling in Oracle’s favor, which has increased uncertainty about the company’s brand reputation among prospects and clients. We will observe closely how this unfolds over the coming quarters.”

9. Banco Bradesco SA (NYSE:BBD)

Number of Hedge Fund Investors: 16

P/E Ratio: 9.73

Another Brazilian penny stock in our list, Banco Bradesco SA (NYSE:BBD) is a financial services company with an 8%+ dividend yield.

Insider Monkey’s database of hedge funds shows that 16 funds had stakes in Banco Bradesco SA (NYSE:BBD)

8. Sirius XM Holdings Inc (NASDAQ:SIRI)

Number of Hedge Fund Investors: 22

P/E Ratio: 9.33

Goldman Sachs recently upgraded Sirius XM Holdings Inc (NASDAQ:SIRI) to Neutral from Sell, saying the stock’s valuation now depicts a balanced risk/reward. However, Goldman cut the stock’s price target to $3.25 to $3.50.

7. Nordic American Tankers Ltd (NYSE:NAT)

Number of Hedge Fund Investors: 16

P/E Ratio: 8.43

With an over 11% dividend yield and a PE ratio of 8.45, Nordic American Tankers Ltd (NYSE:NAT) is one of the most undervalued penny stocks loved by hedge funds. Over the past one year the stock has gained about 16%.

6. Destination XL Group Inc (NASDAQ:DXLG)

Number of Hedge Fund Investors: 14

P/E Ratio: 7.58

Destination XL Group Inc (NASDAQ:DXLG) makes apparel for big and tall men. The stock’s PE ratio stands at 7.58 as of May 8.

Out of the 933 hedge funds in Insider Monkey’s database, 14 funds reported owning stakes in Destination XL Group Inc (NASDAQ:DXLG).

5. Opal Fuels Inc (NASDAQ:OPAL)

Number of Hedge Fund Investors: 12

P/E Ratio: 7.30

With a PE ratio of 7, Opal Fuels Inc (NASDAQ:OPAL),  which makes renewable natural gas for vehicles, is one of the top undervalued penny stocks.

In March, Opal Fuels Inc (NASDAQ:OPAL) talked about guidance in its earnings call:

For full year 2024 guidance, assuming $3 D3 RIN, $2 per MMBtu brown gas and $65 per metric ton LCFS, we expect our full year 2024 adjusted EBITDA to be $90 million to $100 million and RNG production to be 4.4 million to 4.8 million MMBtus.

Our adjusted EBITDA guidance does not include several items of note: One, the potential of $40 million of cash proceeds and income in 2024 that would result from favorable ITC resolution. Two, RNG pending monetization increase of approximately $15 million. And three, project development and start-up costs of approximately $12 million which do not get capitalized. As we disclosed last quarter, we are no longer recognizing RNG pending monetization in our calculation of adjusted EBITDA, although we continue to provide detail on our inventory and credits sold each quarter as well as a period ending balance. A reminder that this represents the value of our December 2024 RNG production, where the costs have been recognized in our 2024 adjusted EBITDA results, but we have not yet sold and transferred the RINs or LCFS credits associated with that RNG, effectively having our 2024 results include revenues associated with December 2023 production, while recording our December 2024 production costs.

Read the full earnings call transcript here.

As of the end of the last quarter of 2023, 12 hedge funds had stakes in Opal Fuels Inc (NASDAQ:OPAL).