There is always confusion among investors regarding what a cheap stock really means, whether it’s a stock that is traded at a lower monetary price, like below the $10 mark or below the $5 mark, or a stock that is cheap in terms of valuation. While in a literal sense, stocks that trade at a lower price do fit the definition of being ‘cheap stocks’, when experts and analysts use the term they are usually referring to the stocks that trade at a lower multiple when compared to their peer group or the overall market. Apart from this, a lot of investors also hold the notion that just because a stock trades below a certain dollar mark, it carries a higher risk. Though that might be true for some stocks, it is not always the case. Subscribing to widely held, but incorrect beliefs like these many times causes investors to miss out on opportunities that stocks which trade below the $10 or $5 mark present from time to time. Whereas individual investors might pass on such opportunities, hedge funds, who are known for generating outsized returns, never shy away from them. Keeping that in mind, we at Insider Monkey decided to analyze the portfolio data of the more than 700 elite funds we cover to identify five stocks under-$5 which are widely held by hedge funds and thus, have the potential to rise significantly in the short to medium-term.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by over 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
First up on our list is social game developer Zynga Inc (NASDAQ:ZNGA). Although the shares of the company have collapsed by almost 75% from its IPO price of $10 per share, they have remained relatively range-bound throughout 2015. At the end of June, 29 funds in our database had a stake in Zynga Inc (NASDAQ:ZNGA), with an aggregate value of $619.41 million, which was down from 31 hedge funds with investments worth $648.41 million at the end of March. However, these 27 funds held over 27.7% of the outstanding shares of Zynga in aggregate at the end of June. On September 15, Zynga Inc (NASDAQ:ZNGA) announced that it had acquired social casino games developer Rising Tide Games, though the company didn’t disclose at what price the acquisition was made. Karthik Sarma‘s SRS Investment Management was one of the hedge funds that initiated a stake in the company during the April-June period and owned almost 17.68 million shares as of June 30.
Brazil-based energy behemoth Petroleo Brasileiro Petrobras SA (ADR)(NYSE:PBR) was the fourth most-held under-$5 stock among hedge funds as of June 30. Even though the shares of the company appreciated by 50.6% during the second quarter, they couldn’t hold on to their gains and now trade down by 37.5% year-to-date. The phenomenal rise of Petroleo Brasileiro Petrobras SA (ADR)(NYSE:PBR)’s stock during the second quarter also didn’t reflect in its popularity among hedge funds, with the number of hedge funds we track who owned a stake in the company declining to 31 from 35 during the second quarter and the aggregate value of investors’ holdings rising by a paltry 3.12% to $760.56 million during that period. Petroleo Brasileiro Petrobras SA (ADR)(NYSE:PBR) announced yesterday that its Chairman, Murilo Ferreira will be taking leave until November 30 and that Luiz Nelson de Carvalho, the head of the audit committee of the company, will serve as the interim Chairman during that period. In wake of the recent decline in crude oil prices, which will affect its profitability in the coming years, and the corruption scandal that hit the company a few months ago, Petroleo Brasileiro Petrobras SA informed its shareholders recently that it is making efforts to reduce its corporate expenses down to $12 billion by 2019. Doug Silverman and Alexander Klabin‘s Senator Investment Group was the largest shareholder of the company among funds we cover, owning 20.0 million shares at the end of June.
32 hedge funds covered by us reported owning a stake in broadcasting company Sirius XM Holdings Inc. (NASDAQ:SIRI) worth an aggregate $1.47 billion at the end of June, representing 7.20% of the company. Sirius XM Holdings Inc. (NASDAQ:SIRI) is the only stock in our list that is trading in the green this year, up by almost 10% year-to-date. Last month the company announced the launch of four new channels which will help it enhance its lead in the commercial-free music space. Sirius XM Holdings boasts a gross profit margin of 62.80%, which is unusually high when compared to its competitors and the company’s ROE has improved rapidly over the past few quarters. Two of the most revered hedge funds on the Street, Jim Simons‘ Renaissance Technologies and Steve Cohen‘s Point72 Asset Management, significantly upped their stake in Sirius XM Holdings Inc. (NASDAQ:SIRI) during the second quarter, to 19.58 million shares and 10.88 million shares respectively.
Moving on, the stock of discount marketplace Groupon Inc (NASDAQ:GRPN) has had a gradual decline throughout 2015, which has resulted in its market cap being reduced by half since the start of the year. This possibly explains why even though the number of hedge funds covered by us that held a stake in Groupon Inc (NASDAQ:GRPN) dropped by only one during the second quarter, from 32 at the end of March, the aggregate value of investors’ holdings in it dropped by 47.5% to $220.28 million. Nevertheless, the funds we track still amassed 6.50% of the company’s outstanding shares as of June 30. Several analysts that cover Groupon Inc (NASDAQ:GRPN) continue to remain bullish on it and believe that the company’s efforts in improving its mobile site and improving the quality of merchants on its platform will pay rich dividends in the future. Cliff Asness‘ AQR Capital Management increased its stake in the company by 85% during the April-June period to around 5.34 million shares.
Finally, we have California-based oil and natural gas producer California Resources Corp (NYSE:CRC). Though the number of hedge funds covered by us that were long in the company went up by six during the second quarter from 31 at the end of March, and these funds owned 30.20% of all common stock of California Resources Corp (NYSE:CRC), the aggregate value of investors’ holdings in the company dropped by more than 30% to $703.87 million. Shares of California Resources Corp (NYSE:CRC) had a terrific bull run during the first four months of the year, however, they have more than halved since then and currently trade down by 44.24% year-to-date. This significant drop in the stock price might be the reason why analysts at Bank of America, who have a ‘Buy’ rating on the stock, lowered their price target on it to $12 from $15 last month, which nonetheless still represents substantial upside. Among the hedge funds covered by us, Billionaire Ken Griffin‘s Citadel Investment Group was one of the funds that reduced its stake in the company significantly during the quarter, as it sold over 2.85 million shares of the company to bring its total holding down to around 4.25 million shares at the end of June.
Disclosure: None
