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Five Cheap Finance Stocks With Big Hedge Fund Support

With many investors expecting the Federal Reserve to raise interest rates during the next FOMC meeting, it’s no surprise that many hedge funds are long financial stocks. Not only are many stocks in the sector cheap relative to their book values, but also many of the companies will benefit from higher interest rates in the form of wide net interest margins. In this article, we analyze five financial stocks trading under $10 that many big hedge funds hold in their portfolios, including Regions Financial Corp (NYSE:RF), MGIC Investment Corp. (NYSE:MTG), WMIH CORPORATION (NASDAQ:WMIH), Fortress Investment Group LLC (NYSE:FIG), and MBIA Inc. (NYSE:MBI).
Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).
– Number of Hedge Fund Holders (as of March 31): 23
– Total Value of Hedge Fund Holdings (as of March 31): $217.74 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 18.00%
A total of 23 elite funds from our database held shares of MBIA Inc. (NYSE:MBI) at the end of the first quarter, unchanged from the end of the previous quarter. With a price to book value of 0.27, MBIA is one of the cheapest stocks on the market today. The company also has some risks, such as around $1.4 billion of gross par exposure to Puerto Rico Electric Power Authority (PREPA). If things get worse in Puerto Rico, more losses could occur for MBIA. Nevertheless, MBIA is participating in the consensual restructuring of that debt and the downside risks might be overblown. Analysts have a consensus price target of $10.25 per share. Cliff Asness’ AQR Capital Management owned almost 180,000 shares at the end of March.
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#4 Fortress Investment Group LLC (NYSE:FIG)

– Number of Hedge Fund Holders (as of March 31): 23
– Total Value of Hedge Fund Holdings (as of March 31): $126.28 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 6.80%

Fortress Investment Group LLC (NYSE:FIG) was included in 23 funds’ equity portfolios at the end of March, up by five over the quarter. One reason more hedge funds could be holding shares of the company could be that Fortress’ stock is trading at just 5.5 times forward earnings. Another reason could be that the company raised its base quarterly dividend by 13% to $0.09 per dividend-paying share in May. The company also has total uncalled capital or ‘dry powder’ of $7.3 billion at the end of March. If used correctly, the dry powder can unlock substantial value in the shares, which so far have been roughly flat year-to-date.

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– Number of Hedge Fund Holders (as of March 31): 33
– Total Value of Hedge Fund Holdings (as of March 31): $150.3 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 31.20%

WMIH CORPORATION (NASDAQ:WMIH) emerged from bankruptcy proceedings as the successor to Washington Mutual in March, 2012. Since its emergence, the company has been operating in runoff mode and has not written any new business since September of 2008. The company has, however, raised substantial capital from KKR to fund acquisitions to take advantage of its $6 billion in NOLs at the end of December. Because of its capital raise, some view WMIH as a KKR ‘special purpose acquisition vehicle’ and think the success of WMIH depends on KKR’s investing talents. Overall, 33 hedge funds tracked by Insider Monkey are long the stock because they think WMIH will make good acquisitions that will deliver solid returns on capital.

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#2 MGIC Investment Corp. (NYSE:MTG)

– Number of Hedge Fund Holders (as of March 31): 37
– Total Value of Hedge Fund Holdings (as of March 31): $745.3 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 28.60%

MGIC Investment Corp. (NYSE:MTG)’s shares have retreated because the company raised rates on its new insurance to earn decent returns on capital. Many investors thought the rate hikes would shrink the company’s new insurance written and ultimately lower MGIC’s income. Some analysts are unfazed, however. BTIG’s Mark Palmer believes the impact of the pricing competition within the PMI industry is already baked into the stock price and has a price target of $12 a share. According to the latest round of 13F filings, 37 investors agree with the bullish sentiment. Doug Silverman and Alexander Klabin’s Senator Investment Group was a top shareholder at the end of March.

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#1 Regions Financial Corp (NYSE:RF)

– Number of Hedge Fund Holders (as of March 31): 41
– Total Value of Hedge Fund Holdings (as of March 31): $802.99 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 7.90%

Regions Financial Corp (NYSE:RF) reported a solid first quarter, with EPS of $0.20 on revenues of $1.37 billion, versus estimates of $0.19 and $1.34 billion, respectively. Average loans and leases rose by 5% year-over-year to $82 billion while NIM expanded 11 basis points sequentially to 3.19%. Tangible book value was $8.97 per share, up from $8.39 in the first quarter of 2015. Given the strong economy and the expected rising rates, it isn’t surprising that 41 elite funds held shares of the bank at the end of March; look for the stock to do well as interest rates normalize.

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