In this article we present the list of 10 Small-Cap Value Stocks Hedge Funds Love.
Lyft, Inc. (NASDAQ:LYFT), Macy’s, Inc. (NYSE:M), and Tenet Healthcare Corp (NYSE:THC) are near the top of the list of small-cap value stocks that hedge funds love.
After more than a decade of being routinely crushed by growth stocks, value stocks are finally getting some love in 2022, as rampant inflation and fears of a recession have caused investors to unload their riskier growth stocks for added portfolio stability.
Value stocks are typically defined as stocks that have lower growth rates, but which in return often feature more attractive valuations in terms of price to sales, price to earnings, and price to book. Dividend value stocks also tend to boast much stronger yields than dividend growth stocks, given the heftier valuations in relation to their dividend paying power that the latter possess.
During the six-month period ended April 30, the MSCI World Value Index gained 33.2%, which the MSCI World Growth Index trailed by slighter more than 10 percentage points. The divide has been even greater in the U.S, where the Russell 1000 Value gained 36.3%, besting its growth counterpart by 12 percentage points.
While the current economic climate was certainly the catalyst for value stocks to make gains on growth stocks, there appeared to be a reckoning coming for growth stocks either way.
Research conducted by Cliff Asness’ AQR Capital Management showed the dispersion between growth and value stocks’ respective valuations actually eclipsed 2000’s dot-com bubble levels last year, and still hovers around the dot-com’s peak levels even after a correction this year. Asness described it as a “giant mispricing” and predicted that value stocks would make a great deal of money over the next three years.
With that in mind, let’s check out some of the top small-cap value stocks that leading money managers, including some of the most savvy value investors in the world, love the most.
Our Methodology
The following data is gathered from hedge funds’ 13F filings data with the SEC. We follow hedge funds because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q1 2022 reporting period.
10 Small-Cap Value Stocks Hedge Funds Love
10. Travere Therapeutics, Inc. (NASDAQ:TVTX)
Number of Hedge Fund Shareholders: 29
Lyft, Inc. (NASDAQ:LYFT), Macy’s, Inc. (NYSE:M), and Tenet Healthcare Corp (NYSE:THC) are some of the most well-known small-cap value stocks that hedge funds love. A less heralded name is Travere Therapeutics, Inc. (NASDAQ:TVTX), which has enjoyed a 32% spike in hedge fund ownership over the past four quarters.
A rare diseases biopharmaceutical company, Travere Therapeutics, Inc. (NASDAQ:TVTX)’s leading candidate sparsentan is an investigational treatment for two rare kidney disorders that often lead to kidney failure. The FDA recently accepted Travere’s accelerated approval application for sparsentan’s use in one of those disorders.
Canaccord analyst Edward Nash believes sparsentan has the potential to become a blockbuster drug for Travere Therapeutics, Inc. (NASDAQ:TVTX) that could become the standard of care for both of the aforementioned disorders. He models for combined peak sales of $1.4 billion by 2032 and has a ‘Buy’ rating and $42 price target on TVTX shares.
9. Alaska Air Group, Inc. (NYSE:ALK)
Number of Hedge Fund Shareholders: 30
There’s been a 26% drop in the number of hedge funds long Alaska Air Group, Inc. (NYSE:ALK) over the past two quarters, but the stock nonetheless remains one of the most popular small-cap value plays among hedge funds. Ken Griffin’s Citadel Investment Group had the largest position in ALK at the end of March, consisting of 1.82 million shares valued at $106 million.
Alaska Air Group, Inc. (NYSE:ALK) is coming off one of its strongest quarters ever, flying at a record load factor of 88% during the period. June was also its best ever month, as it topped $1 billion in revenue during the final 30 days of Q2. All told, Alaska Air pulled in $2.66 billion during the quarter, while ex-items EPS was $2.19.
While Alaska Air Group, Inc. (NYSE:ALK) expects capacity for the current fiscal year to trail 2019 levels by about 8% to 9%, it nonetheless anticipates 15% to 17% greater CASMex compared to the last pre-pandemic year, alongside adjusted pre-tax margins of between 6% and 9%. During the second quarter, the latter figure was 14%, landing it near the top of the industry.
8. Affiliated Managers Group, Inc. (NYSE:AMG)
Number of Hedge Fund Shareholders: 31
Hedge fund ownership of Affiliated Managers Group, Inc. (NYSE:AMG) has remained remarkably steady over the past few quarters, as many funds appear content to hold on to their investments in fellow investment manager AMG. The company’s affiliate network includes several prominent hedge funds, Cliff Asness’ AQR Capital Management and Donald Yacktman’s Yacktman Asset Management among them.
Affiliated Managers Group, Inc. (NYSE:AMG)’s Q2 revenue came in at $604.1 million, while economic EPS was $4.03, both of which topped consensus estimates. Following the company’s Q2 results, Deutsche Bank analyst Brian Bedell raised his price target on AMG to $154 from $133 and kept a ‘Buy’ rating on the shares, citing the company’s differentiated position among asset managers and its willingness to spend excess capital on share repurchases as some of the firm’s positive traits.
Longleaf Partners Fund is bullish on Affiliated Managers Group, Inc. (NYSE:AMG)’s valuation given the hefty 30x EBITDA price tag on Baring Asia’s Q1 sale to EQT AB, as laid out in the fund’s Q1 2022 investor letter:
“AMG – In one of the bigger disconnects between stock price performance and appraisal value growth, AMG declined in line with a generic US money manager, correlating to the S&P 500. AMG’s reality is much more compelling, given its managers are a diversified mix of US and Global public equities, private equity, wealth management, and fund-of-funds. Our appraisal grew strongly in the quarter as private equity affiliate Baring Asia sold for 30xEBITDA (earnings before interest, taxes, depreciation and amortization) or mid-teens expected 2023 earnings (more than double where AMG is valued today) for a combination of cash and EQT AB shares.”
7. Brookdale Senior Living, Inc. (NYSE:BKD)
Number of Hedge Fund Shareholders: 32
Brookdale Senior Living, Inc. (NYSE:BKD) has half the hedge fund ownership it did throughout parts of 2014 and 2015, but remains a popular value stock to this day. Larry Robbins’ Glenview Capital and James E. Flynn’s Deerfield Management are two of the company’s biggest shareholders, owning 12.6 million and 5.38 million shares respectively.
Brookdale Senior Living, Inc. (NYSE:BKD), which operates upper scale retirement centers, had consolidated occupancy of 75.2% in June, including 76.6% at month’s end. Its weighted average occupancy was up by 4.1 percentage points year-over-year during Q2, its strongest annual growth rate in more than a decade.
Brookdale Senior Living, Inc. (NYSE:BKD) trades at 0.33x sales and 1.50x book value, about par for the course in terms of its five-year averages. Its price/cash flow ratio is now more than double that average however, at 16.57x. After generating $19.8 million in free cash flow during 2020, the company lost $271 million on that front a year later.
6. Revlon, Inc. (NYSE:REV)
Number of Hedge Fund Shareholders: 36
Closing out the first half of the list is Revlon, Inc. (NYSE:REV), which hedge funds have been bullish on, but which recently filed for Chapter 11 bankruptcy protection. As one of the 5 Most Shorted Stocks to Watch in July, there is immense pressure and pessimism surrounding Revlon’s comeback bid and its shares’ ultimate value. Short interest in Revlon hit a record 105% in the middle of July.
In its bankruptcy filings, Revlon, Inc. (NYSE:REV) cited its $3.5 billion debt load as leaving it unable to meet its payment obligations to critical suppliers. Revlon earned approval for a loan of up to $1.4 billion during the bankruptcy proceedings, with the company committing to exit bankruptcy by next April.
Revlon shares shot up over 300% in late June, just days after it filed for bankruptcy, after it was reported that Indian billionaire Mukesh Ambani’s Reliance Industries was considering buying the struggling company. Reliance has not commented on the report.
The Mittleman Global Value Equity Fund liked the rebound it was seeing in Revlon, Inc. (NYSE:REV)’s business, as detailed in its Q1 2022 investor letter:
“For Revlon, given very recent reports by analysts on the extent to which a slowdown in China, higher input costs, and rising interest rates might impact it, MIM provides additional commentary herewith to supplement the update in WWOAW. Revlon’s business is rebounding from the pandemic, despite its stock price continued insistence to the contrary. Sales were +9% in 2021 to $2.08B, adjusted EBITDA +22% to $293M (14.1% EBITDA) margin, gross margin improved to 59.4% from 57.1%. MIM sees the sales rebound accelerating in 2022, estimating +15% to $2.4B (the 2019 pre-pandemic level), and EBITDA at $350M (14.5% EBITDA margin) vs. 12-year average adjusted EBITDA margin of 16.5% (2008-2019) before COVID crushed 2020. The Revlon brand itself performed much better in Q4 2021 (consumption at retail) than the wholesale numbers they reported (Revlon’s sales to its customers, hindered by supply chain disruption) would imply…” (Click here to see the full text)
Lyft, Inc. (NASDAQ:LYFT), Macy’s, Inc. (NYSE:M), and Tenet Healthcare Corp (NYSE:THC) feature on the second part of this list. Which stock is the most popular small-cap value play among hedge funds? Head on over to find out.
5. United States Steel Corporation (NYSE:X)
Number of Hedge Fund Shareholders: 37
United States Steel Corporation (NYSE:X) is near its all-time high in hedge fund ownership after smart money ownership of the company shot up by 42% over the past two quarters. John Overdeck and David Siegel’s Two Sigma Advisors and Joel Greenblatt’s Gotham Asset Management are some of funds that have taken new stakes in United States Steel over the previous two quarters.
Sky-high steel prices are likewise sending United States Steel Corporation (NYSE:X)’s financial results to new heights, with the company delivering a record second quarter. United States Steel pulled in $6.29 billion in revenue and earnings per share of $3.86. Over the past year, the company has generated $6.7 billion in adjusted EBITDA and over $4 billion of free cash flow.
United States Steel Corporation (NYSE:X)’s latest cash infusion allowed the company to launch another $500 million share buyback program after recently completing its prior $800 million authorization. X now trades at just 1.37x earnings and 1.47x cash flow.
4. Academy Sports and Outdoors, Inc. (NASDAQ:ASO)
Number of Hedge Fund Shareholders: 40
Hedge fund ownership of Academy Sports and Outdoors, Inc. (NASDAQ:ASO) dipped by 15% in Q1, but has otherwise been strong over the last several quarters, including jumping by 77% between the company’s Q4 2020 IPO and Q2 2021. Jim Simons’ Renaissance Technologies and Steve Cohen’s Point72 Asset Management both owned more than 1 million ASO shares on March 31, with both also more than doubling their stakes in the company during Q1.
Academy Sports and Outdoors, Inc. (NASDAQ:ASO) has been a strong performer on the market over the last year, gaining 19% amid a declining broader market. The sporting goods retailer has been making strong gains on both the bricks-and-mortar and digital sides of its business, all while chasing down its debt.
Academy Sports and Outdoors, Inc. (NASDAQ:ASO) issued strong 33% – 33.5% gross margin guidance for FY 2022 in June alongside its second quarter results, which prompted a price target upgrade to $72 from $70 by Stephens analyst Daniel Imbro, who has an ‘Overweight’ rating on the stock. ASO shares trade at 6.38x forward earnings, down from 8.29x in 2020.
3. Macy’s, Inc. (NYSE:M)
Number of Hedge Fund Shareholders: 42
Hedge fund ownership of Macy’s, Inc. (NYSE:M) is up by 50% since Q3 2020, though it remains about 33% off the stock’s all-time high smart money ownership levels of 2016. David Tepper’s Appaloosa Management owns 7.91 million shares of Macy’s worth $193 million after selling off 22% of his holding during Q1.
While Macy’s, Inc. (NYSE:M) is making inroads on e-commerce sales and had a strong 2021 (revenue up 40%) compared to easier pandemic comps, the long-term outlook for the company’s 500 full-line stores remains murky. NIKE, Inc. (NYSE:NKE) cut ties with Macy’s and several other wholesalers last year as it pushes its direct-to-consumer model, which highlights the lack of moat that Macy’s business has. Macy’s shares have lost 35% of their value this year and trade at 0.21x sales and 3.42x earnings.
The ClearBridge Investments Small Cap Value Strategy likes Macy’s, Inc. (NYSE:M)’s progress on paying down its debt and growing its online sales, as revealed in the fund’s Q3 2021 investor letter:
“Meanwhile, Macy’s, an omnichannel retail organization that operates stores, websites, and mobile applications under the Macy’s, Bloomingdale’s, and Bluemercury brands, also had a strong quarter (+21.5%). Macy’s delivered strong second-quarter earnings, beating on earnings and revenue and raising guidance as the retailer continues to pay down debt and grow its digital business.”
2. Lyft, Inc. (NASDAQ:LYFT)
Number of Hedge Fund Shareholders: 47
Lyft, Inc. (NASDAQ:LYFT) was a hedge fund darling upon first going public in Q1 of 2019, but smart money ownership of the stock has sunk by 37% since then. There has been a 38% jump in shareholders over the past two quarters however, and the company still ranks second on this list. Panayotis Takis Sparaggis’ Alkeon Capital Management owns the largest position in LYFT among the funds tracked by our database, owning 5.67 million shares. It’s owned the company since its market debut.
Lyft, Inc. (NASDAQ:LYFT) is facing several headwinds that have driven investors to the sidelines in recent quarters, as shares of the ride sharing operator have crashed by 69% year-to-date. Demand for the sector remains strong, but high oil prices are heavily weighing on the firm’s profit potential and broader economic concerns are also causing unease. Lyft laid off 60 people, or about 2% of its workforce, last month and shuttered its car rental program. LYFT shares trade at just 1.36x sales.
Rowan Street Capital is no longer confident about Lyft, Inc. (NASDAQ:LYFT)’s value proposition, unloading the stock in Q1 in favor of more promising positions, as revealed in its Q1 2022 investor letter:
“Lyft (NASDAQ:LYFT): We sold Lyft in Q1 ’22 to fund the acquisitions of our 3 new positions as we’ve outlined. We had owned Lyft for a little less than 3 years and realized approximately 50% gain on the stock. The new companies we bought with the proceeds from the sale are significantly better businesses, in our view.”
1. Tenet Healthcare Corp (NYSE:THC)
Number of Hedge Fund Shareholders: 57
Hedge fund ownership of Tenet Healthcare Corp (NYSE:THC) has nearly doubled since the middle of 2020, reaching an all-time high for the stock at the end of Q1, and pushing it to the top of the list of small-cap value stocks that hedge funds love. Larry Robbins’ Glenview Capital and Andreas Halvorsen’s Viking Global own large stakes in THC, consisting of 6.38 million and 2.23 million shares respectively.
Tenet Healthcare Corp (NYSE:THC) was one of several hospital operators that suffered a cyberattack during the second quarter, which impacted the company’s full-year top-line guidance. THC’s cash flow and bottom-line forecasts weren’t affected though. THC’s improving profitability metrics haven’t been reflected in its stock price, which is trading at a forward P/E of just 11.3x, well below its five-year average of 14.1x.
Oakmark Funds shared its thoughts on Tenet Healthcare Corp (NYSE:THC) and the pandemic’s effects on the industry in its Q3 2021 investor letter:
“Tenet may be best known as the second-largest public hospital chain in the U.S., but its largest business is outpatient acute care centers. In early 2020, investors fled the health care industry because of the great uncertainty that the pandemic presented. The early days of the pandemic were very hard on the hospital industry especially, but as the Covid-19 surge peaked and diminished, hospitals were able to schedule elective procedures and engage in profitable activities.”
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Disclosure: None. 10 Small-Cap Value Stocks Hedge Funds Love is originally published at Insider Monkey.
