We recently compiled a list of the 10 Most Undervalued Mid Cap Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Comerica Incorporated (NYSE:CMA) stands against the other undervalued mid cap stocks.
Mid-cap stocks are often seen as a balanced investment option. They offer a mix of growth potential and financial stability, and have historically outperformed large-cap and small-cap stocks over longer periods for this reason, as mentioned earlier in February by Simeon Hyman, Global Investment Strategist at ProShares Advisors. We covered his detailed sentiment in our 10 Best Performing Mid Cap Stocks to Buy According to Analysts article. Mid-caps are considered undervalued in some cases and provide opportunities for investors seeking quality at a discount. Their domestic focus and higher earnings quality compared to small caps make them an attractive choice for stable growth.
This sentiment was covered earlier on January 25 by Jill Carey Hall, BofA global research head of US small and mid cap strategy. She appeared on CNBC’s ‘Closing Bell’ to discuss small cap headwinds and the opportunity in domestic mid caps due to a tough backdrop for the Russell 2000. The profits growth recovery story for small caps, which many investors were optimistic about last year, has continued to be revised downward and pushed further into 2025. As a result, small-cap profits have continued to disappoint, with negative year-over-year earnings growth still prevalent. In contrast, mid-caps have shown better fundamentals. Hall emphasized that if the market broadens out, mid-caps could offer the best risk-reward, especially in an environment where multiple rate cuts have been priced out of the market. Her economists at BofA expect the Fed to remain on hold without further cuts. This scenario poses refinancing risks for small caps, which have reemerged as rate risks have increased. Mid-caps, however, have better balance sheets and fundamental trends, making them a preferable choice within the small and mid-cap space.
Interest rates also influence small-cap performance. Despite optimism around the economy and potential policies from Trump 2.0, small caps have struggled to achieve sustained gains after brief rallies. Historically, small caps have underperformed for over a decade. While relative valuations suggest they could outperform over the next decade, near-term challenges persist. Investors are cautious due to high expectations and ongoing profit disappointments. Hall noted that rate stabilization or potential rate cuts could support small caps, but Fed policy has been a major driver of recent volatility in this segment. For instance, December marked the worst month for small-cap performance relative to large caps in over 25 years following a hawkish Fed meeting. This year, Hall recommended focusing on companies with strong profits, lower leverage, reduced refinancing risks, or economic sensitivity. Financials appear well-positioned to benefit from potential deregulation or an uptick in M&A. Additionally, stocks with upward earnings revisions have outperformed recently and remain attractive targets.
Methodology
We used the Finviz stock screener to compile a list of the top mid-cap stocks that were trading between $2 billion and $10 billion, and had a forward P/E ratio under 15 each. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q4 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A shot of a financial advisor meeting with a wealthy couple discussing their portfolio.
Comerica Incorporated (NYSE:CMA)
Forward P/E Ratio as of March 5: 11.12
Number of Hedge Fund Holders: 50
Comerica Incorporated (NYSE:CMA) is a diversified financial services company. It delivers a suite of banking and wealth management solutions across the US, Canada, and Mexico. It serves businesses, individuals, and high-net-worth clients.
Its Commercial Banking segment has a focus on middle-market and corporate lending. Despite industry-wide challenges in 2024, the company demonstrated strength in this segment in Q4 2024. Its focus on building and maintaining client relationships translates directly into loan growth potential. While overall loan demand was soft, Comerica Incorporated’s (NYSE:CMA) projections indicate targeted growth with full-year average loans projected to be flat to up 1% in 2025, and 2% growth excluding commercial real estate.
In Q4, customer deposits grew by over $800 million, or over 1%. It projects full-year average customer deposits to grow 1% in 2025. This directly impacts the company’s Net Interest Income (NII), which is a core component of its profitability. The company projects a 6% to 7% increase in full-year 2025 NII due to its management of the loan and deposit mix, alongside careful interest rate risk mitigation.
Ariel Global Fund sees Comerica Incorporated (NYSE:CMA) as a strong investment opportunity. The firm believes that it’s well-positioned to benefit from future economic growth and rate adjustments, despite current challenges. Here’s what it said in its Q3 2024 investor letter:
“We purchased Comerica Incorporated (NYSE:CMA) a financial holding company whose revenue is primarily generated across three business segments: the Commercial Bank, the Retail Bank and Wealth Management. The company offers a high-touch business model with an enhanced focus on long-term customer relationships. Lower deposit levels and declining demand for loans driven by the Fed’s quantitative tightening regime as well as deteriorating credit conditions presented an attractive entry point. Looking ahead, we believe the company is well-positioned to take advantage of economic growth, which should lead to enhanced deposit gathering and loan generation. Additionally, we expect more moderate rate cuts to allow for margin expansion and slower deposit cost increases. At today’s valuation, we believe the risk/reward is skewed to the upside.”
Overall CMA ranks 5th on our list of the most undervalued mid cap stocks to buy according to hedge funds. While we acknowledge the potential of CMA as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CMA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.