In this article, we will take a look at the 10 best under-the-radar stocks to buy according to hedge funds.
The market bloodbath of 2022 spared no one and the $4 trillion hedge fund industry was no exception
However, a Bloomberg report in December highlighted that some segments of the hedge funds industry did manage to outperform the market. The report said that they were able to do so due to their resources, massive funds and “an army of traders.”
The report said that major hedge funds like Citadel and Millennium Management produced “double-digit gains” while notable hedge funds that focus on macro-economic trends were also among the winners. These funds include Haidar Capital and Rokos Capital Management.
Time and again the hedge fund industry has proven that the institutional power often trumps individual effort. Major hedge funds have a huge edge in the market over small investors mainly due to their sheer size, reach and cash. For example, in 2022, D.E. Shaw & Co.’s two biggest hedge funds posted returns of at least 20%. The primary reason behind their profits, according to Bloomberg, was market volatility, the very reason that crushed average investors. DE Shaw’s flagship Composite fund gained about 24% in the year, according to Bloomberg. This fund invests across several asset classes and geographies. Similarly, DE Shaw’s Oculus fund, which focuses on macro investments, jumped 20% in 2022.
Many hedge funds were winners in 2022, and it seems they are ready to reap more benefits in 2023. Bloomberg quoted Mario Unali, a senior money manager at Kairos Partners, who thinks:
“Next year is almost the perfect setting for a hedge fund strategy. You get higher rates, you get more volatility, you get fundamentals that are back in business and it’s not going to be all about passive investments.”
That’s why in this article we are going to focus on the under-the-radar bets of elite hedge funds that you should consider in 2023.
Pixabay/Public Domain
Methodology
We scanned Insider Monkey’s database of 920 hedge funds and picked top 10 stocks that are not very popular among average investors but present attractive investment opportunities. These under-the-radar companies are operating in a diverse range of industries and can grow big for the reasons we mention in their respective paragraphs. The list is ranked according to the number of hedge funds having stakes in these companies as of the end of the September quarter.
Best Under-The-Radar Stocks To Buy According To Hedge Funds
10. PubMatic, Inc. (NASDAQ:PUBM)
Number of Hedge Fund Holders: 12
PubMatic, Inc. (NASDAQ:PUBM) is an under-the-radar stock that is currently down amid macroeconomic headwinds that have crushed the advertising industry. PubMatic, Inc. (NASDAQ:PUBM)’s services allow digital content publishers and ad buyers to make the most out of the internet advertising ecosystem. However, amid recession fears and major policy changes by tech companies, adtech stocks are down. But PubMatic, Inc. (NASDAQ:PUBM) bulls say that the stock can rebound strongly when recession fears will recede and ad buyers will start to increase spending.
PubMatic, Inc. (NASDAQ:PUBM) has shown impressive growth over the past few years. The company delivers around 400 billion daily ads.
Quant investor Jim Simons’ Renaissance Technologies is one of the biggest stakeholders of the adtech company out of the 920 hedge funds tracked by Insider Monkey. The hedge fund has a $12.5 million stake in the company as of the end of the September quarter. Another notable investor in PubMatic, Inc. (NASDAQ:PUBM) is Schonfeld Strategic Advisors, which has a $4.3 million stake in the company. Overall, 12 hedge funds have stakes in the company.
9. Lithium Americas Corp. (NYSE:LAC)
Number of Hedge Fund Holders: 14
Lithium Americas Corp. (NYSE:LAC) is a Canadian company that is involved in the mining of lithium-bearing spodumene and pegmatite ores in the United States and Argentina. Lithium Americas Corp. (NYSE:LAC) is operating in the lucrative lithium market that is expected to enjoy huge growth amid the EV battery boom. In November, Lithium Americas Corp. (NYSE:LAC) said it will separate its North American and Argentine business units into two independent public companies.
As of the end of the third quarter, 14 hedge funds tracked by Insider Monkey reported having stakes in Lithium Americas Corp. (NYSE:LAC), compared to 9 funds in the previous quarter.
8. SEMrush Holdings, Inc. (NYSE:SEMR)
Number of Hedge Fund Holders: 16
SEMrush Holdings, Inc. (NYSE:SEMR) is a Boston, Massachusetts-based company that is known for its SEO platform that allows internet publishers and digital marketers to conduct keyword research, SEO analysis of websites, among several other tasks. Semrush stock has lost nearly 55% over the past year. For the third quarter, the company posted GAAP EPS of -$0.06 beating estimates by $0.03. Revenue in the quarter jumped 33.5% on a year-over-year basis to reach $65.8 million, beating the estimates by $1.83 million. The company said that its ARR as of September 2022 was $267 million, up 33% YoY. Semrush also reported that it has reached 94,000 paying customers as of the end of the September quarter, which shows a 17% growth from the year-ago period.
Like other internet publishing and growth stocks, Semrush is also facing the heat of recession fears. SEMrush Holdings, Inc. (NYSE:SEMR) could rebound sharply once these fears recede
A total of 16 hedge funds tracked by Insider Monkey had stakes in SEMrush Holdings, Inc. (NYSE:SEMR) as of the end of the third quarter of 2022.
7. YETI Holdings, Inc. (NYSE:YETI)
Number of Hedge Fund Holders: 23
YETI Holdings, Inc. (NYSE:YETI) is a Texas-based company that makes outdoor equipment like water bottles, backpacks, outdoor apparel and camping equipment. While YETI Holdings, Inc. (NYSE:YETI) has lost about 45% in the last 12 months, analysts think that YETI Holdings, Inc. (NYSE:YETI) could rebound sharply in the coming months.
In November, Canaccord Genuity started covering the stock with a Buy rating. The firm’s analyst Brian McNamara said that the company has built a global lifestyle brand that has a “staying power.” The analyst, who set a $58 price target on the stock, said that latest fears about mean reversion and temporary margin headwinds have overshadowed its solid fundamentals.
The stock “should be as bear-proof as its coolers,” the analyst added.
As of the end of the third quarter, 23 hedge funds tracked by Insider Monkey reported having stakes in YETI Holdings, Inc. (NYSE:YETI), compared to 18 hedge funds in the previous quarter. Ken Griffin’s Citadel Investment Group has an $11.6 million stake in the company.
6. Upwork Inc. (NASDAQ:UPWK)
Number of Hedge Fund Holders: 25
Despite the widespread fame of remote work, work-from-home jobs, online learning and employment opportunities, the world’s biggest online marketplace for freelancers, Upwork Inc. (NASDAQ:UPWK), remains an under-the-radar stock. According to Upwork’s own estimates, close to 59 million Americans freelance amid the tough jobs market and changing working dynamics.
While Upwork Inc. (NASDAQ:UPWK)’s growth has cooled amid the current macroeconomic backdrop and weak execution, the rise of remote work trends is expected to drive growth in the future.
In the third quarter, Upwork Inc. (NASDAQ:UPWK) posted a non-GAAP EPS of -$0.03 beating the Street estimates by $0.05. Revenue in the quarter jumped about 24% to reach $158.64 million, beating estimates by $1.3 million. Upwork said that it ended the third quarter with 818,000 active clients.
Of the 920 hedge funds tracked by Insider Monkey, 25 reported having stakes in Upwork Inc. (NASDAQ:UPWK) as of the end of the third quarter. The total value of these stakes was about $263 million. The biggest stakeholder of the company is David Brown’s Hawk Ridge Management which owns a $57 million stake.
5. Five Below, Inc. (NASDAQ:FIVE)
Number of Hedge Fund Holders: 28
Pennsylvania-based Five Below, Inc. (NASDAQ:FIVE) operates discount stores which sell most of their products under $5. As recession fears mount and inflation increases, consumers are more likely to visit discount stores. Last month, Bank of America counted Five Below, Inc. (NASDAQ:FIVE) among the three stocks it recommends to investors for 2023.
“Within our coverage universe, these are the companies with the best combination of company-specific growth initiatives, a relatively favorable macro backdrop, and attractive valuation,” BofA said.
As of the end of the second quarter of 2022, Five Below, Inc. (NASDAQ:FIVE) operated about 1,200 stores across 40 states in the US. The company’s revenue has increased at a 17% CAGR in the past five years. The company’s stores have attractive products for teens and tweens.
As of the end of the third quarter of last year, 28 hedge funds tracked by Insider Monkey had stakes in the company, compared to 31 funds in the previous quarter.
Wasatch Global Investors made the following comment about Five Below, Inc. (NASDAQ:FIVE) in its Q3 2022 investor letter:
“Another top contributor was Five Below, Inc. (NASDAQ:FIVE). The company operates a chain of specialty discount stores aimed at “tweens” and teens that sell products that cost up to $5, plus a small assortment of products priced from $6 to $25. While the company lowered guidance for the full year and missed consensus estimates in its most recent quarterly earnings report, guidance for the all-important fourth-quarter holiday season included some positive takeaways. Management also said it expects operating margin expansion due to tight expense controls. In addition, the company is accelerating new store openings, following a pandemic-driven slowdown and construction challenges, which we think will provide future revenue growth.”
4. Vertiv Holdings Co. (NYSE:VRT)
Number of Hedge Fund Holders: 32
Vertiv Holdings Co. (NYSE:VRT) is one of the best under-the-radar stocks as the company is operating in a high-growth market. Vertiv Holdings Co. (NYSE:VRT) sells services and equipment for data centers. In October last year, the stock shot up after Jeff Smith’s Starboard Value revealed a 7.4% stake in the company via 27.8 million shares. A Bloomberg report said that the activist fund will be pushing the company for operational improvements.
A total of 32 hedge funds tracked by Insider Monkey reported having stakes in Vertiv Holdings Co. (NYSE:VRT). The total value of these stakes was $362 million.
Renaissance Investment made the following comment about Vertiv Holdings Co (NYSE:VRT) in its Q3 2022 investor letter:
“Vertiv Holdings Co (NYSE:VRT) was another strong performer after returning 62.9%. The company reported solid quarterly results and showed progress in managing through the raw materials inflationary environment that negatively impacted margins over the past several quarters.”
3. PBF Energy Inc. (NYSE:PBF)
Number of Hedge Fund Holders: 32
PBF Energy Inc. (NYSE:PBF) is a petroleum refinery company and a supplier of unbranded transportation fuels, heating oils, lubricants and petrochemical feedstocks. PBF Energy Inc. (NYSE:PBF) is one of the biggest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants, and other petroleum products in the US.
A total of 32 hedge funds tracked by Insider Monkey reported having stakes in PBF Energy Inc. (NYSE:PBF). The total value of these stakes was $509 million. Several notable hedge funds have stakes in the company. These funds include billionaire Izzy Englander’s Millennium Management ($82 million stake), Ken Griffin’s Citadel Investment Group ($82 million stake) and Peter Rathjens’ Arrowstreet Capital ($73 million stake).
In December, PBF stock gained after the company’s board authorized the repurchase of up to $500 million of its class A stock, sending its shares 7.3% higher.
2. Lantheus Holdings, Inc. (NASDAQ:LNTH)
Number of Hedge Fund Holders: 35
Ranking 2nd in our list of the 10 best under-the-radar stocks to buy according to hedge funds is Lantheus Holdings, Inc. (NASDAQ:LNTH), which makes AI-based diagnostic and therapeutic products. Lantheus Holdings, Inc. (NASDAQ:LNTH) has gained a whopping 81% over the past 12 months. However, in November, the stock fell despite the company posting strong Q3 results and giving an upbeat outlook. The company said that in the third quarter, its worldwide revenue jumped 134% YoY to $239.3 million.
In the quarter, Lantheus Holdings, Inc. (NASDAQ:LNTH) swung to a $61.2 million of net income from $13.4 million of net loss in the prior year quarter. For the full year, the company raised its revenue and adjusted earnings per share guidance to $915 million – $919 million and $3.80 – $3.83, better than the consensus of $899.35 million and $3.55, respectively.
Lantheus stock is owned by 35 hedge funds of the 920 tracked by Insider Monkey. The total value of the stakes of these hedge funds in the company is $422 million.
1. Twilio Inc. (NYSE:TWLO)
Number of Hedge Fund Holders: 58
Twilio Inc. (NYSE:TWLO) is one of the notable under-the-radar stocks to buy according to hedge funds. The Cloud communications technology company is used by thousands of companies and developers all over the world to build communication pipelines for customer support, chatbots, text messages and other forms of communication. Twilio’s Cloud communication service is used by major companies including Lyft, the American Red Cross, Dell and Airbnb.
Twilio Inc. (NYSE:TWLO) is currently under pressure amid macroeconomic headwinds and the launch of ChatGPT, which many believe would give a tough competition to Twilio. However, many analysts believe that Twilio is operating in a different domain than ChatGPT and the company has an established developer and customer base.
A total of 58 hedge funds tracked by Insider Monkey had stakes in Twilio Inc. (NYSE:TWLO) as of the end of the September quarter. The total value of these stakes was $2.1 billion. Cathie Wood’s ARK is the biggest stakeholder of the company, with a $472 million stake.
Here is what RiverPark Funds specifically said about Twilio Inc. (NYSE:TWLO) in its Q2 2022 investor letter:
“Twilio Inc. (NYSE:TWLO) offers a full suite of cloud-based communications software, services and tools that allows companies in a wide range of businesses to build omni-channel communications capabilities (video, chat, voice, SMS, fax and email) directly into their customer facing applications without needing to build back-end infrastructure and interfaces. The company also provides software tools that allow its users to gather and categorize customer data (its Segments offering) and to create next generation call centers (Flex) to utilize this data in customer interactions. Twilio is the leader in this fast growing $80 billion Communications-Platform-as-a-Service (or CPaaS) market, having grown its customer base 5x in the past five years to 268,000 customers and to a $3.5 billion run rate revenue for 1Q22. The company’s net revenue retention rate has exceeded 125% every year since its 2016 IPO and its customer churn remains less than 4% (for customers with > $30,000 revenue), evidence of the loyalty of Twilio’s customers to its platform (and a high switching cost) as well as the company’s increasing number of offerings. The company’s revenue is generated from both recurring revenue from subscription fees as well as volume-based charges for usage.
TWLO expects to maintain a +30% annual organic revenue growth rate through at least 2024, with long-term gross margin expansion from 56% to 60%-65%, and EBITDA margins approaching 35% as revenue scales. As of 1Q22, TWLO had $4.2 billion net cash, and should turn FCF positive this year. Over the next several years, we expect the company to grow its excess cash significantly as the company operates an asset light business model with low capital needs of just over 1% of current revenue.
We forecast 30% annual revenue growth through 2027, with EBITDA margins approaching the company’s long-term model guidance of 27% to generate $11.49 of EPS. At its current stock price, TWLO trades at about 5x this 2027 EPS projection (and trades at only 3x our 2030 EPS estimate). We project that the company will generate nearly 65% of its current enterprise value in excess free cash over the next five years and all of its current enterprise value in excess cash by the end of the decade…” (Click Here to read the full text)
You can also take a peek at 10 Best Diversified Dividend Stocks To Buy and 11 Best Dividend Stocks Under $50.
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Disclosure: None. 10 Best Under-The-Radar Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.
