Five Cheap Stocks Hedge Funds Are Bullish On

For most sophisticated  investors the price, at which a stock trades, has little to no effect on their investment decisions. However, a large number of small investors – despite knowing that the price of a stock doesn’t represent the quality or the size of the underlying business – allocate a large amount of their capital to low-priced stocks. That’s because such stocks are more affordable for them to buy when compared to a stock like Alphabet Inc (NASDAQ:GOOG) which trades at $725 or even a Chipotle Mexican Grill, Inc. (NYSE:CMG) which trades at $458. Considering the affinity that small investors have towards low-priced stocks, we at Insider Monkey come up with a list of such stocks – all priced under $10- based on their popularity among hedge funds covered by us at the end of every quarter. In this post, we are going to reveal and discuss the five low-priced stocks that hedge funds tracked by us loved heading into the second quarter.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Regions Financial Corp (NYSE:RF)

– Investors with Long Positions (as of March 31): 41

– Aggregate value of investors’ holding (as of March 31): $803 million

Let’s start with Regions Financial Corp (NYSE:RF), which is almost on the verge of breaking above the $10 mark. During the first quarter, the number of investors covered by us with long positions in the stock climbed up by five, but the aggregate value of their holdings in it slid by $146.1 million. Funds that initiated a stake in Regions Financial Corp (NYSE:RF) during that period included Fred Cummings‘ Elizabeth Park Capital Management, which bought nearly 1.74 million shares of the company. Led by the better than expected quarter numbers the company reported in April, shares of Regions Financial Corp have appreciated by 22% so far in the second quarter and are trading flat year-to-date. Since the stock of the bank holding company is currently trading at a discount to its book value and at a trailing multiple of only 12.44, most analysts feel that it can see further upside this year.

#4 Hertz Global Holdings Inc (NYSE:HTZ)

– Investors with Long Positions (as of March 31): 47

– Aggregate value of investors’ holding (as of March 31): $1.8 billion

The ownership of Hertz Global Holdings Inc (NYSE:HTZ) among hedge funds covered by us declined by five and the aggregate value of their holdings also fell by $696 million during the first quarter. Notable investors that brought down their holding in the company during that period included Karthik Sarma‘s SRS Investment Management and Jeffrey Tannenbaum‘s Fir Tree. While SRS Investment Management reduced its stake by 18% to 10 million shares, Fir Tree cut it by 56% 56% to 7.77 million shares. Hertz Global Holdings Inc (NYSE:HTZ) has been continuously losing market share to ridesharing services like Uber, which has taken a heavy toll on its financial results and stock price for the last two years. On May 9, the company reported a fiscal first quarter loss for the first time in several quarters. While analysts had expected it to report a loss of $0.01 per share on revenue of $2.39 billion, Hertz Global Holdings declared a loss of $0.12 per share on revenue of $2.31 billion.

#3 Staples, Inc. (NASDAQ:SPLS)

– Investors with Long Positions (as of March 31): 52

– Aggregate value of investors’ holding (as of March 31): $1.24 billion

Staples, Inc. (NASDAQ:SPLS) burnt the fingers of several hedge funds recently when its stock plummeted after the company along with Office Depot called off their $6.3 billion merger. Heading into the second quarter, several hedge funds were confident that this merger would get completed as the ownership of the stock among funds tracked by us had gone up by three and the aggregate value of their holdings had increased by $182 million during the first quarter. James Dondero‘s Highland Capital Management  was one of the lucky hedge funds that managed to save itself from heavy losses by selling all the 334,900 shares it held of Staples, Inc. (NASDAQ:SPLS) during the first quarter. On May 18, Staples reported its first quarter numbers, which included EPS of $0.17 on revenue of $5.10 billion, versus analysts’ projections of $0.16 in EPS on revenue of $5.08 billion. The quarterly results impressed analysts of Bank of America and they upgraded Staples to ‘Buy’ from ‘Underperform’ and raised their price target to $10 from $8.10.

#2 Rite Aid Corporation (NYSE:RAD)

– Investors with Long Positions (as of March 31): 52

– Aggregate value of investors’ holding (as of March 31): $960.22 million

Moving on, the number of hedge funds tracked by Insider Monkey that have long positions in Rite Aid Corporation (NYSE:RAD) increased by five during the first quarter. However, despite a 4%  rise  in Rite Aid Corporation (NYSE:RAD)’s stock during the same period, the aggregate value of hedge funds’ holdings in the company fell by $266 million. Rite Aid Corporation (NYSE:RAD)’s stock took a hit last month as the company awaits regulatory approval for its $17.2 billion merger with Walgreens Boots Alliance Inc. (NASDAQ:WBA). Speculations are rife regarding why the stock has fallen so much and increased its merger arbitrage spread by more than 15%. While some analysts believe it’s because investors are fearing that  regulators will block this merger just like they have blocked several other mergers in the past few months, others think that it’s a result of large institutional investors selling Rite Aid Corporation’s stock in droves. Nancy Havens-Hasty‘s Havens Advisors upped its stake in Rite Aid Corporation by 143% to almsot 1.65 million shares during the first quarter.

#1 Office Depot Inc (NASDAQ:ODP)

– Investors with Long Positions (as of March 31): 58

– Aggregate value of investors’ holding (as of March 31): $1 billion

While hedge funds are generally great at picking stocks and generating outsized returns, they are not infallible. This is the learning  that one comes across when looking at Office Depot Inc (NASDAQ:ODP)’s popularity among hedge funds during the first quarter and the performance of its stock during the current quarter. The ownership of the company among hedge funds covered by us saw a an increase of 26% and the aggregate value of their holdings in it swelled by over 60% during the first quarter. However, after Office Depot Inc (NASDAQ:ODP) announced the termination of its merger with Staples its stock has fallen dramatically, erasing the 26% in gains it made during the first quarter and losing more than one-third of its value so far this year. On May 17, the company revealed its future strategy in the wake of the termination of its merger with Staples, which includes making additional acquisitions and increasing its presence in the markets for break room and cleaning supplies as well as selling some of its European assets. Simon Davies‘ Sand Grove Capital Partners initiated a stake in Office Depot Inc during the first quarter by purchasing 765,500 shares.

Disclosure: None