In this article, we will take a look at the 13 most undervalued penny stocks to buy according to hedge funds.
Investors rejoiced a strange optimism last month as growth stocks and cryptocurrencies rallied, mostly driven by data that showed inflation might be peaking. The Federal Reserve at the time also hinted that the inflation levels are finally starting to move towards its desired levels. Several analysts commented that the bull market has finally started. According to BNN Bloomberg, Brian Belski, chief investment strategist at BMO Capital Markets, thinks that the “big secular bull market” that started in the US in 2009 remains in place. The analyst said that the technology sector “is unlikely to be a leading sector for the bull market currently underway.”
However, in hindsight that optimism feels unfounded as later data proved that inflation is not decreasing and the Federal Reserve might not pause its rate hikes, after all.
According to a Bloomberg report published on January 30, about 70% of the respondents in the latest MLIV Pulse survey said that the market is yet to find a bottom. The report said that the latest market rally is fickle and could end if major companies like Apple, Meta and ExxonMobil post weak earnings or issue soft guidance.
The Bloomberg report quoted Michael Sheldon, chief investment officer at RDM Financial Group, who thinks that “it’s a difficult time” since stocks have risen recently but this isn’t what the Fed wants as it’s looking to slow economic growth to tame inflation. The biggest factor that would end the current rally in the stock market is the latest jobs report which showed that companies in the US are continuing to hire despite the Fed’s rate-hike spree and inflation.
The report also said that experts are forecasting economic activity to contract in the second or third quarter of this year. The report again quoted Michael Sheldon, who thinks the US economy could enter a recession and there are “some economic indicators already signaling that it’s likely.” However, Sheldon said that he thinks the stock market has “probably bottomed” but he “wouldn’t be surprised to see additional weakness in the spring as investors incorporate weaker economic data and lower profits.”
Bull market or not, undervalued stocks with long-term growth potential always remain attractive investment target for wise investors who do not get carried away with the short-term market movements or speculation. That’s why in this article we decided to see what where hedge funds — institutions with a lot of cash, top talent and resources at their disposal — are putting their money when it comes to cheap stocks. It’s always interesting to switch one’s focus from big companies to small, relatively unknown companies that can disrupt their respective markets and grow big in the future.
Photo by Ruben Sukatendel on Unsplash
Our Methodology
For this article, we scanned Insider Monkey’s database of 920 hedge funds’ holdings and picked top 15 stocks priced under $5 and with PE ratios under 10, as of February 5. This means these are the most popular penny stocks among hedge funds that are currently trading at attractive PE ratios. The list is ranked in ascending order of the number of hedge funds having stakes in these companies.
Most Undervalued Penny Stocks To Buy According To Hedge Funds
13. Canaan (NASDAQ:CAN)
Number of Hedge Fund Holders: 9
A total of 9 hedge funds tracked by Insider Monkey as of the end of the third quarter of 2022 reported owning stakes in China-based hardware company Canaan (NASDAQ:CAN). On a year-to-date basis, Canaan has gained a whopping 85% in 2023 as of Feb. 5. Canaan could gain this year if the crypto rally continues. In the third quarter, Canaan’s GAAP EPADS came in at $0.05, missing estimates by $0.05. Revenue in the quarter fell 32.8% in the period to total $137.5 million, missing estimates by $7.76 million.
For the last quarter of 2022, Canaan said it expects revenue to come in at about $43.6 million.
12. Ring Energy, Inc. (NYSE:REI)
Number of Hedge Fund Holders: 10
An important thing to note about Ring Energy, Inc. (NYSE:REI) is that it is also one of the most shorted stocks on Wall Street. Some analysts believe Ring Energy, Inc. has decent fundamentals and the stock could be a profitable short-squeeze bet in the future if retail investors, especially Redditors, begin to pile into the stock to fuel its price. As for the hedge funds, 10 funds in Insider Monkey’s database had stakes in Ring Energy, Inc. at the end of the third quarter.
In November Ring Energy, Inc. posted its third-quarter results. Ring Energy, Inc.’s adjusted EPS in the period came in at $0.28, beating estimates by $0.04. Revenue in the quarter jumped 91.2% on a year-over-year basis to reach $94.4 million. The revenue figure surpassed estimates by $20.59 million.
11. Vicarious Surgical Inc. (NYSE:RBOT)
Number of Hedge Fund Holders: 11
Vicarious Surgical Inc. (NYSE:RBOT) is a surgical robotics company. Insider Monkey’s database of 920 hedge funds shows that 11 hedge funds had stakes in Vicarious Surgical Inc. as of the end of the September quarter. The net worth of these stakes was $181 million. On a year-to-date basis, Vicarious Surgical Inc. has gained 45% in value in 2023 through February 5.
10. Franklin Street Properties Corp. (NYSE:FSP)
Number of Hedge Fund Holders: 12
Franklin Street Properties Corp. (NYSE:FSP) ranks 10th in our list of the most undervalued penny stocks to buy according to hedge funds. This REIT is also a good dividend option for those looking for cheap dividend stocks. Franklin Street Properties Corp. in January declared a $0.01 per share quarterly dividend. The forward dividend yield came in at 1.29%. As of the end of the third quarter of 2022, 12 hedge funds reported owing stakes in Franklin Street Properties Corp.. The net worth of these stakes was $9.1 million.
9. VAALCO Energy, Inc. (NYSE:EGY)
Number of Hedge Fund Holders: 13
Texas-based VAALCO Energy, Inc. (NYSE:EGY) is involved in hydrocarbon exploration. VAALCO Energy, Inc. has gained about 7% year to date in 2023. Its PE ratio stands at 3.92 as of February 5. As of the end of the third quarter of 2022, 13 hedge funds had stakes in VAALCO Energy, Inc., according to Insider Monkey’s database of hedge fund holdings. The net worth of these stakes was about $27 million. In November, VAALCO Energy, Inc. posted third-quarter results. Adjusted EPS in the period came in at $0.56. Revenue in the period jumped about 40% to total $78.1 million. During the quarter VAALCO Energy, Inc. generated an adjusted EBITDAX of $42.4 million.
VAALCO Energy, Inc. also pays a dividend. As of February 5, VAALCO Energy, Inc.’s dividend yield stands at 2.86%. In October, the company declared a $0.0325/share quarterly dividend.
8. Senseonics Holdings, Inc. (NYSE:SENS)
Number of Hedge Fund Holders: 13
Medical technology firm Senseonics Holdings, Inc. (NYSE:SENS) ranks 8th in our list of the most undervalued penny stocks to buy according to hedge funds. As of the end of the third quarter of 2022, 13 hedge funds in Insider Monkey’s database of 920 funds had stakes in Senseonics Holdings, Inc., up from 8 funds in the previous quarter. The total value of these stakes was $14.1 million. The biggest stakeholder of Senseonics Holdings, Inc. during this period was Mike Masters’ Masters Capital Management. The hedge fund had a $9.2 million stake in Senseonics Holdings, Inc..
In November, Senseonics Holdings, Inc. fell after the company posted mixed quarterly results. Revenue in the September quarter jumped about 31%. Senseonics Holdings, Inc. however narrowed its full-year 2022 guidance.
7. Holley Inc. (NYSE:HLLY)
Number of Hedge Fund Holders: 14
Automotive performance company Holley Inc. (NYSE:HLLY) ranks 7th in our list of the most undervalued penny stocks to buy according to hedge funds. Holley Inc. has gained about 61% in value so far in 2023 through February 5. Holley Inc.’s PE ratio still looks attractive at 5.71. In November, Holley Inc. posted third-quarter results that beat estimates. Holley Inc.’s EPS in the third quarter came in at $0.27, surpassing estimates by $0.22. Revenue in the quarter fell 2.9% on a year-over-year basis to total $154.8 million, beating analyst forecasts by $2 million.
As of the end of the third quarter of 2022, 14 hedge funds reported owning stakes in Holley Inc.. The most notable of these hedge funds was Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners which has a stake worth about $9 million in Holley Inc..
Wasatch Global Investors made the following comment about Holley Inc. in its Q3 2022 investor letter:
“Another detractor was Holley Inc. (NYSE:HLLY). The company makes high-performance automotive parts for car and truck enthusiasts. We initially invested based on our assessment that Holley had a loyal customer base, healthy margins and specialized product offerings that could enable the company to better withstand the impacts of inflation. Recently, the stock has been down due to lowered revenue and earnings guidance resulting from difficulty in obtaining semiconductor chips for key products on the one hand, and trouble in reducing inventory on the other hand. We’re currently evaluating Holley to determine the extent to which its problems have resulted from poor execution by the company’s leadership. Of particular concern to us is Holley’s debt level in an environment of lower earnings.”
6. New Gold Inc. (NYSE:NGD)
Number of Hedge Fund Holders: 14
New Gold Inc. (NYSE:NGD) is a Canadian-based mining company. New Gold Inc. has a PE ratio of 7.5 as of February 5. A total of 14 hedge funds in Insider Monkey’s database of 920 funds had stakes in New Gold Inc. at the end of the third quarter of 2022. The total value of these stakes was about $36 million. The biggest stakeholder of New Gold Inc. during the period was Jim Simons’ Renaissance Technologies which had a $13.6 million stake in the firm. Another notable stakeholder of New Gold Inc. during the same period was Eric Sprott’s Sprott Asset Management with a $12 million stake.
5. Solid Power, Inc. (NASDAQ:SLDP)
Number of Hedge Fund Holders: 15
Solid Power, Inc. (NASDAQ:SLDP) is operating in the high-growth and lucrative battery industry. Solid Power, Inc. has gained about 53% year to date. It has a PE ratio of 2.13. Of the 920 hedge funds in Insider Monkey’s database as of the end of the third quarter, 15 hedge funds had stakes in Solid Power, Inc.. The biggest stakeholder of Solid Power, Inc. during the period was Ken Griffin’s Citadel Investment Group which owns a $3.6 million stake.
In December, the stock rose after Solid Power, Inc. said it will expand its joint development agreement with BMW Group. According to the deal, Solid Power, Inc. will give BMW an R&D license for its all-solid-state cell design and manufacturing technology.
4. Organogenesis Holdings Inc. (NASDAQ:ORGO)
Number of Hedge Fund Holders: 15
Organogenesis Holdings Inc. (NASDAQ:ORGO) is a regenerative medicine company. Organogenesis Holdings Inc. has gained about 7% year to date in 2023. Organogenesis Holdings Inc. has a PE ratio of 6.14 as of February 5. As of the end of the third quarter of 2022, 15 hedge funds out of the 920 funds tracked by Insider Monkey had stakes in Organogenesis Holdings Inc.. The most significant hedge fund stakeholder in this period was Guy Levy’s Soleus Capital $21 million. The second most significant stakeholder in Organogenesis Holdings Inc. was Israel Englander’s Millennium Management, with over $4.8 million stake.
3. UWM Holdings Corporation (NYSE:UWMC)
Number of Hedge Fund Holders: 17
UWM Holdings Corporation (NYSE:UWMC) is a Michigan-based mortgage lending company. With a PE ratio of 8.64 as of February 5, it is one of the most undervalued penny stocks to buy according to hedge funds. Of the 920 funds tracked by Insider Monkey as of the end of the third quarter of 2022, 17 hedge funds had stakes in UWM Holdings Corporation. The net worth of these stakes was $13.4 million. Amid the current headwinds in the market driven by mortgage market uncertainty, UWM Holdings Corporation could face short-term turbulence. However, UWM Holdings Corporation is a solid dividend payer with a high yield. UWM Holdings Corporation’s dividend yield stands at over 8% as of February 5.
2. Vacasa, Inc. (NASDAQ:VCSA)
Number of Hedge Fund Holders: 17
Vacasa, Inc. (NASDAQ:VCSA) is a vacation rental management platform company. Vacasa, Inc. has lost about 68% in value over the past year, as of February 5. At the end of the September quarter of 2022, 17 hedge funds reported owning stakes in Vacasa, Inc.. The net worth of these stakes was about $304 million. The biggest stakeholder of Vacasa, Inc. was Jim Davidson, Dave Roux, and Glenn Hutchins’s Silver Lake Partners, which had a $192 million stake in the firm. The second biggest stakeholder in Vacasa, Inc. during the same period was Jeffrey Diehl’s Adams Street Partners which has a $51 million stake in the firm.
1. MultiPlan Corporation (NYSE:MPLN)
Number of Hedge Fund Holders: 24
MultiPlan Corporation (NYSE:MPLN) is operating in the healthcare sector, providing data analytics and technology-enabled cost management solutions to healthcare companies. MultiPlan Corporation has a PE ratio of 8.58 as of February 5. It is a popular penny stock among hedge funds. Of the 920 funds tracked by Insider Monkey, 24 funds had stakes in MultiPlan Corporation as of the end of the third quarter of 2022. The net worth of these stakes was about $185 million. In November 2022, MultiPlan Corporation posted third-quarter results. Its GAAP EPS in the period came in at $0.03, meeting estimates. Revenue in the period fell 13.1% on a YoY basis to $250.5 million. MultiPlan Corporation updated its full-year 2022 guidance. It expects revenue of $1,075 million to $1,090 million in the period.
Diamond Hill Capital made the following comment about MultiPlan Corporation in its Q3 2022 investor letter:
“On an individual holdings’ basis, top contributors to return in Q3 included short positions in MultiPlan Corporation (NYSE:MPLN), WD-40 Company and United Parcel Service (UPS). MultiPlan is a healthcare services business providing out-of-network cost management solutions to healthcare payors. In our view, MultiPlan was a compelling short opportunity due to a combination of a high valuation and several fundamental risk factors, including a high degree of customer concentration, rising regulatory risk and high leverage limiting its ability to seek strategic alternatives. In Q3, its share price reacted negatively after disclosing that one of its largest customers was renewing its contract on terms less favorable for MultiPlan — which was in line with our thesis. With the share price subsequently trading below our estimate of intrinsic value, we chose to cover the short position.”
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originally published on Insider Monkey.
