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Five Cheap Stocks Hedge Funds Are Bullish On

At Insider Monkey, we follow around 800 hedge funds and other institutional investors as part of our strategy, which involves identifying the most popular small-cap stocks among these investors (see more details here). In the last couple of months, the Russell 2000 Index, which is a benchmark for the small-cap space in the US stock market has underperformed the S&P 500 and analysts expect it to lag further in the near- to medium-term. However, one of the advantages of investing in small-caps is that they are relatively cheap, which can allow for more price inefficiency and provide higher returns, though they are usually associated with more risk. With this in mind, we have selected five stocks that are trading below $10 per share and rank as the most popular among the funds we track.

Most stocks in this list registered a decrease in popularity, which can be justified by their recent weak performance. Surprisingly, the iShares Russell 2000 ETF (IWM) saw more funds holding long positions over the quarter at the end of December (read more here). The fifth most-popular cheap stock among the funds we track is MGIC Investment Corp. (NYSE:MTG), in which 42 funds held stakes worth $1.02 billion in aggregate at the end of last year, compared to 47 funds holding shares worth $1.34 billion a quarter earlier. Nevertheless, the investors from our database still amassed nearly 34% of the company’s outstanding stock heading into 2016. Among them, Howard Marks’ Oaktree Capital Management owns 9.03 million shares of MGIC Investment Corp. (NYSE:MTG). MGIC Investment Corporation provides mortgage insurance and ancillary services. Over the last 52 weeks, MGIC’s stock has lost more than 21%, amid a considerable slide over the last couple of months. Earlier this month, Standard & Poor’s Ratings Service upgraded MGIC Investment Corp. (NYSE:MTG)’s core operating subsidiaries credit rating to ‘BBB’ from ‘BB+’. At the same time, S&P raised the unsolicited senior unsecured debt issue and counterparty credit rating to ‘BB’ and junior subordinated debt rating to ‘B+’. The upgrade in credit rating shows that the company has been on a path to improve its operating performance, the credit rating agency said.

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Office Depot Inc (NASDAQ:ODP) also saw the number of funds with long positions decline during the last three months of 2015. At the end of December, 46 funds from our database owned shares of the $2.90 billion office products supplier, versus 47 funds a quarter earlier. Consequently, the aggregate value of their holdings fell to $627.20 million from $964.83 million and represented 20.30% of the company. Over the last year, Office Depot’s stock has slid by more than 43%. Among the funds that cut their exposure to Office Depot Inc (NASDAQ:ODP) is Jeff Smith’s Starboard Value, which unloaded 89% of its stake to 4.48 million shares during the October-December period. Moreover, earlier this month, Starboard revealed in a filing that it holds 25.0 million shares underlying ‘Call’ options and Jeff Smith owns directly 45,836 shares. Starboard’s move is interesting, since the fund pushed for the merger of Office Depot Inc (NASDAQ:ODP) with Staples. The merger had been expected to be completed by February 4, but in January both companies decided to extend the date to May 16 in order to clear all hurdles and to finish an antitrust litigation with the Federal Trade Commission.

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Rite Aid Corporation (NYSE:RAD) is the only stock in this list, in which the number of funds with long positions went up during the last quarter of 2015, although just by one. As of the end of December, 47 funds among those we track held shares with a total value of $1.23 billion, versus $1.0 billion a quarter earlier. In this way, these funds held 15% of Rite Aid Corporation (NYSE:RAD) at the end of last year. The increase in popularity came amid Walgreens Boots Alliance Inc (NASDAQ:WBA)’s proposal to acquire Rite Aid in a $17.2 billion deal. The combined company will be the largest drugstore chain in the US with around 13,000 stores across the country. Last month, shareholders of Rite Aid voted in favor of the deal and it still has to clear regulatory hurdles. Among the funds we track, the largest shareholder of Rite Aid Corporation (NYSE:RAD) is Nick Niell’s Arrowgrass Capital Partners, which initiated a stake containing 30.26 million shares during the fourth quarter.

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On the second spot in Staples, Inc. (NASDAQ:SPLS), in which the number of funds holding shares declined to 49 from 54 during the last quarter. The aggregate value of positions held by the funds we track slid to $1.05 billion from $1.34 billion and totaled 17.30% of the company’s outstanding stock. As mentioned earlier in this article, Staples, Inc. (NASDAQ:SPLS) is currently in the process of acquiring Office Depot in a $5.5 billion deal. For the last quarter, Staples reported EPS of $0.26 on revenue of $5.30 billion, down by 16% and 7% on the year, respectively. Among the funds we track, the largest shareholder of Staples, Inc. (NASDAQ:SPLS) is Richard S. Pzena’s Pzena Investment Management, which owns 33.30 million shares, according to its latest 13F filing.

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Finally, Sunedison Inc (NYSE:SUNE) ranked as the most popular cheap stock among the funds we track, even though it registered a huge decline in popularity amid the slump of its share price. At the end of December, 50 funds held long positions worth $512.32 million in aggregate, versus 73 funds with $1.06 billion worth of shares a quarter earlier. At $1.91 per share, Sunedison is also the cheapest stock in this list and the funds from our database held nearly 32% of the company’s stock at the end of 2015. Shares of Sunedison Inc (NYSE:SUNE) have lost some 91% over the last 12 months. The latest hit, the stock took at the end of February, when the company announced that it would delay filing its annual 10-K filing with the SEC, because of some questions regarding its financial positions. The announcement comes as Sunedison is in the process of completing the acquisition of Vivint Solar for $1.90 billion, which was opposed by some investors, such as David Tepper’s Appaloosa Management. Appaloosa owns 9.5% of Sunedison’s yieldco Terraform Power. On the other hand, an investor that has been bullish on Sunedison Inc (NYSE:SUNE), despite the weak performance of the stock is David Einhorn’s Greenlight Capital, which, in January, disclosed holding 27.15 million shares and reached an agreement to appoint and independent director to Sunedison’s board.

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Disclosure: none

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