In this article, we will look at the 7 Best Small-Cap Value Stocks to Buy According to Hedge Funds. Let’s look at where Weatherford International (WFT) stands against other small-cap value stocks.
Today’s AI-fueled era of the “Magnificient Seven” technology stocks is dominating the US stock market. However, investing with a focus on value stocks hasn’t lost its popularity. In March, a Bloomberg report detailed how many investment firms were pouring money into value stocks, primarily in sectors like energy, financials, utilities, and materials.
Among the various investors preferring these sectors, Nanette Abuhoff Jacobson, global investment strategist of Hartford Funds, who liked stocks from these “unloved sectors,” made the list. The Bloomberg report also mentioned Presilium Private Wealth, which found value investing to be attractive in the current environment.
During the 2024 Sohn Investment Conference, billionaire David Einhorn claimed that it was a great time to be a value investor, while also continuing to say that value investing is dead as an industry. When asked about these contradictory statements, he said that the value investing industry and value investing as an investing strategy are two distinct things.
Many fund managers who were paid heavily by people to research undervalued stocks for them have lost their jobs and assets under management amid a shift to index funds where “millions of dollars were redeemed” out of those conventional strategies. But Einhorn said that this development has decreased the competition in the industry, paving the way for people like him to be in a unique position to find undervalued stocks.
Are Value Stocks a Better Choice Than Growth Stocks?
On August 16, Vahan Janjigian, CIO at Greenwich Wealth Management, joined “The Exchange” on CNBC to discuss why value stocks may perform better than growth stocks in a low-rate environment. Broadly speaking, investors seem to think that lower interest rates are better for growth stocks as compared to value stocks. Janjigian believes that it also depends upon the shape of the yield curve. With the economy stabilizing and the Fed cutting interest rates, the yield curve can potentially normalize. He says that this happening can prove better for value stocks that pay good dividends than for growth stocks that do not pay dividends.
Janjigian also says that although he invests in other stocks through ETFs, he tends to be a value investor, favoring value stocks that pay good dividends and have been growing over time. He named three of his favorites, which include Pfizer, Verizon, and IBM. Viewing these stocks as substitutes for bonds, he reflects on the similarities between the two, claiming that they are long-term investments with very good yields.
Dave Sekera, Morningstar’s Chief U.S. Market Strategist, said that the best value is in the small cap category. In a CNBC interview in August, he said that the small-cap category trades at a 15% discount to their fair value, highlighting stocks like Kraft Heinz that looked like attractive investments.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded companies with market caps between $1 billion and $10 billion (our definition of small caps) and forward P/E ratios of less than 15 as of October 1, 2024. From this list, we selected the 7 stocks with the highest number of hedge funds holders as of Q2 2024, and used that as our ranking metric. We gave preference to stocks that come from sectors like consumer, healthcare, energy, materials, and utilities.
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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Best Small-Cap Value Stocks to Buy According to Hedge Funds
Weatherford International (NYSE:WFT)
Market Cap: $6.21 billion
Forward P/E: 11.69
EPS Growth This Year: 26.50%
Number of Hedge Fund Holders: 43
Weatherford (NYSE:WFT) is a global energy services company that provides services and equipment necessary for the drilling, well construction, evaluation, completion, production, intervention, and responsible abandonment of wells in the natural gas and oil exploration and production industry. The company also operates in new energy platforms, and is divided into three segments: Well Construction and Completions (WCC), Drilling and Evaluation (DRE), and Production and Intervention (PRI).
WCC specializes in services and products for well integrity assurance. DRE offers an array of services, including wireline, managed pressure drilling, drilling fluids, and drilling services. PRI, in contrast, offers a suite of reservoir stimulation designs and engineering capabilities that unlock reserves and isolate zones in unconventional and conventional deep water, wells, and aging reservoirs. Its platforms span across CygNet, ForeSite, and CENTRO.
Weatherford (NYSE:WFT) is running on strong fundamentals, delivering above-expectation cash performance and margins in Q2 2024. Its adjusted EBITDA margins came in at 26%, driven by some asset sales. Despite Q2 being an interest paying quarter, it delivered free cash flow of $96 million. Revenue in the quarter grew 3.5% sequentially, experiencing a 10% year-over-year improvement with all business segments growing. The company faced certain short-term roadblocks that kept its performance at the lower end of expectations, such as the social unrest in Colombia, activity shifts in Mexico, and the Houston storm in May. These happenings adversely affected some of the company’s facilities and caused operational disruptions.
Despite such short-term headwinds, Weatherford (NYSE:WFT) is steadfastly working on margin expansion and pricing discipline. Its international business is also demonstrating strength, growing 6% sequentially and 14% year over year. This was driven by a 29% year-over-year growth in the Middle East, Asia, and North African region. Q2 marks the 13th consecutive quarter of year-over-year international revenue growth in the company, with the Middle East, North Africa, and Asia being the primary drivers. This reflects the company’s strong potential in these regions.
Weatherford (NYSE:WFT) has also made significant improvements to its balance sheet, highlighting its resilience. It repaid more than $1 billion of debt, expanded and added a credit facility, reduced interest costs by more than $100 million, and brought its net leverage ratio down to 0.5 times. It ranks sixth on our list of the top small-cap value stocks to buy according to hedge funds.
Overall, WFT ranks sixth among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of WFT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.