In this article, we will look at the 8 Hot Penny Stocks To Invest In According to Hedge Funds. Let’s look at where Mereo BioPharma Group (MREO) stands against other hot penny stocks.

Financial markets are betting that the Federal Reserve’s half-point interest rate cut in September will be followed by slower and smaller moves due to the surge in US job growth. A Labor Department report released on Friday, October 4, shows that employers added around 254,000 jobs in September, which was much more than expected. Unemployment declined to 4.1%. Federal Reserve chair Jay Powell said that the US Central Bank would consider returning to its more usual quarter-point cut in November if economic data remained robust.

In back-to-back appearances on Yahoo Finance and Bloomberg TV, Chicago Fed President Austan Goolsbee called the jobs report “superb,” saying that continued strong labor market data would give him additional confidence that the US economy is not headed for a crash and is at the full employment goal of the Fed.

Even so, he said that Fed policymakers would likely need to cut rates by “a lot” over the coming 12 to 18 months to ensure the strength of the labor market and that inflation stays around the Fed’s 2% target, as it has in recent months.

Stocks Surge After Job Report Gives Investor Confidence

Stocks surged on Friday, October 4, after the better-than-expected jobs report boosted investor confidence and perception about the health of the US economy. Michelle Cluver, head of ETF model portfolios at Global X, said:

“After a summer of weak labor data readings, this is a reassuring reading that the US economy remains resilient, supported by a healthy labor market. We remain in an environment where good economic news is good news for the equity market as it increases the potential for a soft landing.”

This bounce helped offset the losses sustained in recent days. After an unusually strong first nine months of 2024, increasing geopolitical tensions in the Middle East resulted in a shaky start in October for stocks.

Will Small Caps Rally in the Coming Days?

The US economy has successfully evaded the chances of a recession. The expected performance of small caps in a slowing economy has thus become an important discussion. Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management recently joined CNBC for an interview to talk about exactly that: the expected performance of small cap stocks in an economy going towards a soft landing. Prial is of the opinion that this is the beginning of a multi-year bull cycle for small cap stocks. Her claim is based on certain underlying reasons, including small caps being significantly underowned at the present. In fact, they are standing at record lows as a percentage of the total equity market.

In addition, the valuations of small caps are substantially attractive, and are considerably below their large cap counterparts in the S&P 500. The relative earnings growth for small cap stocks is another significant factor. With the earnings growth of small cap stocks expanding. Prial expects small cap stocks to be growing faster than their large-cap counterparts by the end of the year. She thinks that the Federal Reserve interest rate cuts and the confidence that the economy is moving towards a soft landing were what we really needed to turn the situation around.

Examining the S&P 500 EPS growth rate estimates shows that the market is anticipated to experience more than a 13% year over year growth in Q4 and more than 15% in the coming year. Since Prial mentioned that small caps are likely to outperform large caps in terms of growth in the coming future, she clarified that the overall indices might not be able to perform above the 15% threshold. Investors thus need to be good stock pickers to capitalize on the earnings growth trend, as she believes in a number of small cap stocks experiencing a 15% to 20% growth in the coming year.

Prial further broke the small cap category down, saying that she likes the energy sector in this domain because it will be a major player in the AI and data center industry in the years to come.

Our Methodology

To compile the list of the 8 hot penny stocks to invest in according to hedge funds, we used the Finviz stock screener. We set the price filter to under $5 and the price target filter to positive 40% above price. We then examined the year-to-date performance of these stocks as of October 4, and picked the ones that are up significantly (at least 20%) for the year and are also popular among elite hedge funds. The stocks are sorted in ascending order of the number of hedge fund holders, as of Q2 2024.

Why do we care about what hedge funds do? 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).

Mereo BioPharma Group (NASDAQ:MREO)

Share Price: $4.40

Year to Date Performance: 90.48%

Number of Hedge Fund Holders: 23

Mereo BioPharma Group (NASDAQ:MREO) is a biopharmaceutical company that develops therapeutics for rare diseases. It holds a portfolio of late-stage clinical product candidates. Its two rare disease product candidates include setrusumab (which treats osteogenesis imperfecta (OI)) and alvelestat (which primarily treats severe alpha-1 antitrypsin deficiency-associated lung disease).

Apart from rare disease programs, the company has two oncology product candidates in clinical development: Etigilimab and Navicixizumab. Etigilimab, an IgG1 monoclonal antibody, improves the activation and effectiveness of T-cell and NK-cell antitumor activity. Navicixizumab, a bispecific antibody, is being developed to treat late-line ovarian cancer and inhibits delta-like ligand 4 (DLL4) and vascular endothelial growth factor (VEGF).

Mereo BioPharma Group (NASDAQ:MREO), along with its partner Ultragenyx, announced positive 14-month results from the Phase 2 portion of the ongoing Phase 2/3 Orbit study (NCT05125809). These results showed that treatment with setrusumab continually brought the incidence of fractures in patients with OI down. The treatment results in a fracture rate reduction of 67%, highlighting the potential of setrusumab to bring about long-term, clinically significant benefits for people with this condition. It also brought about meaningful and ongoing improvements in lumbar spine bone mineral density (BMD) at month 12 without evidence of plateau.

The company continues to work through detailed regulatory submissions to ensure the AATD program is Phase 3-ready by the end of the year in the domain of alvelestat. This is running along with its ongoing discussions with multiple potential partners. Mereo BioPharma Group’s (NASDAQ:MREO) proceeds from the June financing position it to support the ongoing pre-commercial activities critical for a successful launch of setrusymad in Europe after its potential approval.

Overall, MREO ranks SIXTH among the 8 hot penny stocks to invest in according to hedge funds. While we acknowledge the potential of MREO 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 MREO 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.