In this article, we discuss the 10 best undervalued small-cap stocks according to hedge funds.
On February 4, a former governor of the Federal Reserve, Lawrence Lindsey, appeared on news platform CNBC to warn viewers that higher inflation will force consumers to limit spending by so much that the economy would likely fall into recession by the summer of 2022. Lindsey was of the opinion that the central bank of the United States was “nowhere close” to being able to tackle the growing inflation. According to the former Fed governor, consumer spending would fall by about 2 benchmark points in the coming months, a “shock” that could trigger a recession.
Even as a recession looms, the US job market is booming. Latest data from the Labor Department indicates that the labor market added 431,000 jobs in March, sending the unemployment rate to 3.6%, a new low since the crash of March 2020. In the past six months, the US economy has added jobs at a monthly average of over 600,000. This unprecedented growth raises questions about sustainability given that inflation has soared to four-decade highs in the meanwhile.
In an annual letter to shareholders released on April 4, Jamie Dimon, the chief of investment bank JPMorgan Chase & Co. (NYSE:JPM), also warned about the risks that the US economy faced, noting that a sustained increase in interest rates by the Fed would “cause lots of consternation and very volatile markets”. Simon said that the unpredictability of the war combined with the problems in the global commodity supply chains made for a potentially “explosive situation” in the coming months.
As COVID-linked federal aid stops, the savings of the pandemic dwindle, and interest rates rise after years, consumer spending patterns are slowing. The markets are likely to become more volatile as investors look for high-income firms to cover their riskier growth bets. In this scenario, some of the best undervalued stocks to buy according to hedge funds include Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), and StepStone Group Inc. (NASDAQ:STEP), among others discussed in detail below.
Our Methodology
These were picked using the Price-to-Earning (PE) ratios and market capitalizations. Stocks that have a PE ratio of around 15 and a market capitalization between $300 million to $2 billion were preferred for the list. The business fundamentals and analyst ratings of each company are also discussed to provide some additional context.
Hedge fund sentiment was included as a classifier as well. Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each company.
Best Undervalued Small-Cap Stocks According to Hedge Funds
10. Delek Logistics Partners, LP (NYSE:DKL)
Number of Hedge Fund Holders: 2
PE Ratio: 12.15
Delek Logistics Partners, LP (NYSE:DKL) is an oil and gas storage and transportation firm. The company has an impressive dividend history with eight consecutive years of dividend growth. The sector median in this regard is just one year. On January 21, the firm declared a quarterly dividend of $0.975 per share, an increase of 2.6% compared to the previous dividend of $0.950. The forward yield was 9.12%. Other earnings metrics are also solid as the firm recently beat market estimates on revenue for the fourth quarter of 2021 by $4.3 million.
As inflation wreaks havoc with the market, Delek Logistics Partners, LP (NYSE:DKL) is a reliable earnings king with a high yield that is trading at cheaper prices in the market compared to peers. It is also expected to grow payouts by 5% in 2022.
At the end of the fourth quarter of 2021, 2 hedge funds in the database of Insider Monkey held stakes worth $1.8 million in Delek Logistics Partners, LP (NYSE:DKL), compared to 1 in the previous quarter worth $939,000.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Delek Logistics Partners, LP (NYSE:DKL) with 28,151 shares worth more than $1.2 million.
Just like Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), JPMorgan Chase & Co. (NYSE:JPM), and StepStone Group Inc. (NASDAQ:STEP), Delek Logistics Partners, LP (NYSE:DKL) is one of the stocks that elite investors have on their radar.
9. Brinker International, Inc. (NYSE:EAT)
Number of Hedge Fund Holders: 35
PE Ratio: 11.39
Brinker International, Inc. (NYSE:EAT) owns and runs casual dining restaurants. The stock has been given a major boost in the past few weeks as the pandemic headwinds recede and investors turn their focus back on the economic recovery. The earnings results of the firm in the fourth quarter of 2021, posted in late February, have given a further boost to the shares. The company beat market estimates on earnings per share and revenue during the fourth quarter by $0.20 and $1.51 million respectively.
On February 2, Stephens analyst James Rutherford maintained an Overweight rating on Brinker International, Inc. (NYSE:EAT) stock and raised the price target to $53 from $45, noting that the staffing of the firm was “on a good trajectory” with applicant flow up meaningfully and retention improving.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Brinker International, Inc. (NYSE:EAT) with 1.2 million shares worth more than $45 million.
At the end of the fourth quarter of 2021, 35 hedge funds in the database of Insider Monkey held stakes worth $185 million in Brinker International, Inc. (NYSE:EAT), compared to 31 in the previous quarter worth $284 million.
8. EnPro Industries, Inc. (NYSE:NPO)
Number of Hedge Fund Holders: 10
PE Ratio: 11.20
EnPro Industries, Inc. (NYSE:NPO) markets engineered industrial products. The firm has recently sold off the only major asset it held in the oil and gas sector, generating $195 million from the sale of Compressor Products International to Howden Group. Flush with the cash, the firm has also increased the dividend payout by 4% to $0.28 per share. In the fourth quarter of 2021, the earnings of the company have beat market expectations too. EnPro is also investing in the semiconductor business as part of a business diversification plan.
EnPro Industries, Inc. (NYSE:NPO) remains on track to deliver in the heavy trucks and auto industries. However, the transition to chips would help the company with profits and better margins, decreasing reliance on the cyclical industrial business.
At the end of the fourth quarter of 2021, 10 hedge funds in the database of Insider Monkey held stakes worth $231 million in EnPro Industries, Inc. (NYSE:NPO), the same as in the previous quarter worth $193 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm GAMCO Investors is a leading shareholder in EnPro Industries, Inc. (NYSE:NPO) with 1 million shares worth more than $117 million.
7. Bloomin’ Brands, Inc. (NASDAQ:BLMN)
Number of Hedge Fund Holders: 40
PE Ratio: 10.58
Bloomin’ Brands, Inc. (NASDAQ:BLMN) owns and runs fine dining restaurants. On February 18, the share price jumped over 10% after the firm posted earnings for the fourth quarter of 2021, reporting a revenue of more than $1 billion, up 29% year-on-year and beating consensus estimates by $10 million. The firm also reported that comparable restaurant sales had increased 27.9% year-on-year in 2021 and the operating margins were up to 16.5% compared to just under 12% in 2020.
On February 22, Raymond James analyst Brian Vaccaro kept a Strong Buy rating on Bloomin’ Brands, Inc. (NASDAQ:BLMN) stock and raised the price target to $30 from $28, appreciating the “strong” earnings and “solid” guidance of the firm in the fourth quarter of 2021.
At the end of the fourth quarter of 2021, 40 hedge funds in the database of Insider Monkey held stakes worth $362 million in Bloomin’ Brands, Inc. (NASDAQ:BLMN), up from 37 the preceding quarter worth $623 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Bloomin’ Brands, Inc. (NASDAQ:BLMN) with 3.6 million shares worth more than $75 million.
6. Banner Corporation (NASDAQ:BANR)
Number of Hedge Fund Holders: 9
PE Ratio: 9.95
Banner Corporation (NASDAQ:BANR) operates as a bank holding firm. The company has paid a dividend to shareholders consistently for the past two decades. The sector median in this regard is just 13 years. On January 20, it declared a quarterly dividend of $0.44 per share, an increase of over 7% compared to the previous dividend of $0.41 per share. The forward yield was 2.81%. The shares have also been given a boost by a recent company decision to repurchase at least 5% of the common stock.
On January 28, Raymond James analyst David Long kept a Strong Buy rating on Banner Corporation (NASDAQ:BANR) stock and raised the price target to $72 from $68, highlighting that the “underpinnings of accelerating growth” were visible for the firm given continued strong originations.
At the end of the fourth quarter of 2021, 9 hedge funds in the database of Insider Monkey held stakes worth $44 million in Banner Corporation (NASDAQ:BANR), compared to 12 in the preceding quarter worth $42 million.
Among the hedge funds being tracked by Insider Monkey, Arkansas-based investment firm Forest Hill Capital is a leading shareholder in Banner Corporation (NASDAQ:BANR) with 290,788 shares worth more than $17.6 million.
In addition to Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), JPMorgan Chase & Co. (NYSE:JPM), and StepStone Group Inc. (NASDAQ:STEP), Banner Corporation (NASDAQ:BANR) is one of the stocks that hedge funds are monitoring.
5. Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI)
Number of Hedge Fund Holders: 10
PE Ratio: 9.62
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) is a New York-based real estate investment trust. The company has an impressive dividend history and has consistently handed out the payouts to shareholders for the past eleven years. On March 15, it declared a quarterly dividend of $0.35 per share, in line with previous. The forward yield was 10.37%. As inflation surges and interest rates rise, investors are actively searching for firms with solid fundamentals to ride the storm. Apollo offers a high income in this volatile environment.
Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) offers good value for money since it invests in mortgages that are secured by commercial properties. As these are floating-rate loans, these provide rising income in a high interest rates environment.
Among the hedge funds being tracked by Insider Monkey, Chicago-based firm Balyasny Asset Management is a leading shareholder in Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI) with 1.2 million shares worth more than $16 million.
At the end of the fourth quarter of 2021, 10 hedge funds in the database of Insider Monkey held stakes worth $27 million in Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI), compared to 7 in the preceding quarter worth $7 million.
4. Victory Capital Holdings, Inc. (NASDAQ:VCTR)
Number of Hedge Fund Holders: 18
PE Ratio: 7.67
Victory Capital Holdings, Inc. (NASDAQ:VCTR) operates as an asset management firm. On March 10, the firm disclosed that assets under management (AUM) were $176 billion in late February, slipping by 0.5% month-on-month. Victory is another undervalued dividend pick. On February 10, the firm declared a quarterly dividend of $0.25 per share, an increase of more than 47% compared to the previous dividend of $0.17. The forward yield was close to 3%. In late December 2021, the firm had announced a $15 million share buyback program.
On February 15, RBC Capital analyst Kenneth Lee kept an Outperform rating on Victory Capital Holdings, Inc. (NASDAQ:VCTR) stock with a price target of $44, underlining that there were “”myriad growth opportunities” for the firm through scaling up recently acquired franchises as well as through future mergers and acquisitions.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm Impax Asset Management is a leading shareholder in Victory Capital Holdings, Inc. (NASDAQ:VCTR) with 972,198 shares worth more than $35 million.
At the end of the fourth quarter of 2021, 18 hedge funds in the database of Insider Monkey held stakes worth $129 million in Victory Capital Holdings, Inc. (NASDAQ:VCTR), compared to 15 in the preceding quarter worth $77 million.
In its Q4 2021 investor letter, Gator Capital Management, an asset management firm, highlighted a few stocks and Victory Capital Holdings, Inc. (NASDAQ:VCTR) was one of them. Here is what the fund said:
“Although higher interest rates will benefit the Fund’s portfolio, we are making sure that the Fund is not simply a bet on higher rates. We have several large holdings with inexpensive valuations and catalysts unrelated to higher interest rates. Victory Capital Holdings, Inc. (NASDAQ:VCTR) is an asset manager making attractive acquisitions of smaller asset managers, trading at 6x earnings, and returning capital to shareholders through increased dividends and share repurchases.”
3. StepStone Group Inc. (NASDAQ:STEP)
Number of Hedge Fund Holders: 19
PE Ratio: 5.61
StepStone Group Inc. (NASDAQ:STEP) is a New York-based investment firm. On February 8, the firm posted earnings for the third fiscal quarter, reporting earnings per share of $0.83 and a revenue of more than $410 million, up 66% year-on-year and beating analyst expectations by $263 million. It also declared a quarterly dividend of $0.15 per share, in line with previous. The forward yield was 1.75%.
In late 2021, Evercore ISI analyst John Dunn had initiated coverage of StepStone Group Inc. (NASDAQ:STEP) stock with an Outperform rating and a price target of $48, highlighting that the firm was “well-positioned in the secularly-growing private markets space” given that it had a “more diverse, global and growing business” in relation to competitors.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Millennium Management is a leading shareholder in StepStone Group Inc. (NASDAQ:STEP) with 1 million shares worth more than $43 million.
At the end of the fourth quarter of 2021, 19 hedge funds in the database of Insider Monkey held stakes worth $113 million in StepStone Group Inc. (NASDAQ:STEP), compared to 13 in the previous quarter worth $60 million.
2. Vista Outdoor Inc. (NYSE:VSTO)
Number of Hedge Fund Holders: 25
PE Ratio: 4.95
Vista Outdoor Inc. (NYSE:VSTO) markets consumer products in the sports and recreation sector. The company is one of the largest players in the recreation market with ownership of around 39 renowned brands in the space. The total addressable market for recreation is around $100 billion. The shares have lots of room to grow as the company improves operational efficiencies and reduces the debt/EBITDA leverage. It is also improving FCF generation.
On February 4, Roth Capital analyst Matt Koranda kept a Buy rating on Vista Outdoor Inc. (NYSE:VSTO) stock with a price target of $57, backing the firm to benefit from a sustained ammo upcycle for the next few quarters.
At the end of the fourth quarter of 2021, 25 hedge funds in the database of Insider Monkey held stakes worth $460 million in Vista Outdoor Inc. (NYSE:VSTO), compared to 23 in the preceding quarter worth $407 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Gates Capital Management is a leading shareholder in Vista Outdoor Inc. (NYSE:VSTO) with 5.3 million shares worth more than $246 million.
In its Q2 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Vista Outdoor Inc. (NYSE:VSTO) was one of them. Here is what the fund said:
“Our Strategy outperformed with strong results from consumer discretionary stocks like Vista Outdoor Inc. (NYSE:VSTO). Vista Outdoor Inc. (NYSE:VSTO), a manufacturer of a wide range of products serving the outdoor sports and recreation markets, also performed well in the period on continued demand and growing margins.”
1. Genworth Financial, Inc. (NYSE:GNW)
Number of Hedge Fund Holders: 19
PE Ratio: 2.19
Genworth Financial, Inc. (NYSE:GNW) provides insurance products. The share price has not registered a significant upside since the company merged with China Oceanwide in 2016. However, this merger was terminated in January last year. Since then, the company has taken a slew of initiatives aimed at strengthening the balance sheet and improving profitability for the long-term aimed at growing dividend payouts and share repurchases.
On March 14, S&P Global upgraded the credit rating of Genworth Financial, Inc. (NYSE:GNW) to B+ from B.
Among the hedge funds being tracked by Insider Monkey, North Carolina-based investment firm Shah Capital Management is a leading shareholder in Genworth Financial, Inc. (NYSE:GNW) with 11.5 million shares worth more than $46 million.
At the end of the fourth quarter of 2021, 19 hedge funds in the database of Insider Monkey held stakes worth $128 million in Genworth Financial, Inc. (NYSE:GNW), compared to 23 in the preceding quarter worth $130 million.
In its Q4 2021 investor letter, Gator Capital Management, an asset management firm, highlighted a few stocks and Genworth Financial, Inc. (NYSE:GNW) was one of them. Here is what the fund said:
“We own positions in both Enact Holdings and its parent company, Genworth Financial, Inc. (NYSE:GNW). Enact is one of six mortgage insurance companies. Mortgage insurance is purchased by borrowers to protect lenders if the borrower defaults on their mortgage. The government mortgage agencies (“GSEs”) require mortgage insurance when the borrower has a down payment of less than 20% of the home’s purchase price. Usually, first-time homeowners are the largest users of mortgage insurance since they often have the most difficult time accumulating enough savings for a 20% down payment. We believe the demand for mortgage insurance will be strong, but the mortgage insurance companies’ stocks are priced as though future earnings will not grow.
Here is our investment thesis on Genworth Financial, Inc. (NYSE:GNW):
Genworth Financial
We also own shares of Enact’s parent company Genworth Financial. We think Genworth is more attractive than Enact. Here is our investment thesis on Genworth:
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Leveraged return on Enact – Genworth’s main asset is the 132 million shares of Enact it still holds. Genworth also has about $1 billion of net debt at its holding company, so it is a leveraged version of Enact. If Enact stock increases in value, Genworth should increase a greater percentage due to…” (Click here to see the full text)
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Disclosure. None. 10 Best Undervalued Small-Cap Stocks According to Hedge Funds is originally published on Insider Monkey.
