16 Most Undervalued Value Stocks To Buy According To Hedge Funds
In this article, we will take a detailed look at the 16 Most Undervalued Value Stocks To Buy According To Hedge Funds. For a quick overview of the 5 such stocks, read our article 5 Most Undervalued Value Stocks To Buy According To Hedge Funds.
Value stocks rebounded early in 2023 amid investors’ worries about the uncharted waters ahead in the midst of record high inflation and rate hikes. But as the year rolled on, value retreated and growth stocks yet again prevailed. This was mostly due to the AI-fueled rally that boosted major tech stocks like Apple, Microsoft, Nvidia, Alphabet, among others. T. Rowe Price in its report titled Why Value Stocks Are Becoming More Competitive Again published in February 2023 said that value stocks “came back with a vengeance” in 2022 and the strengths of value stocks were expected to continue. The MSCI World Value Index outperformed its growth counterpart by more than 20 percentage points in 2022. T. Rowe Price correctly predicted at the time that it believed inflation will ease in 2023. But it also said that chances of very low interest rates were negligible in the near future as the firm believes we are entering an era of elevated inflation and rates. The T. Rowe Price report said that when rates are high, investors tend to favor current earnings instead of future earnings, and this environment bodes well for value stocks.
Is Value Investing Dead?
But despite these expectations, growth stocks crushed value stocks in 2023. Questions are now arising about the future of value investing. Despite being a value investor, David Einhorn last year said value investing might never recover. Einhorn was lamenting the fact that in today’s financial markets, using traditional metrics to value companies and caring about intrinsic value of stocks is no more relevant.
On the other hand, Tom Hancock, GMO’s portfolio manager, gave an interesting perspective on value investing in a program on CNBC. Hancock said that value investing doesn’t mean just focusing on low-priced indexes and multiples. According to Hancock intrinsic value is what matters the most. He said our focus should be the companies that can grow with high return on capital and are reasonably priced.
While the value versus growth debate might never end, one thing remains constant: investing in companies with solid businesses that can grow over time has been rewarding over longer periods of time. This is a game mastered by elite hedge funds, and in this article we decided to take a look at some value stocks with low PE ratios attracting the interest of hedge fund managers.
Photo by Kaleidico on Unsplash
Methodology
For this article we first used a stock screener to identify value stocks with PE ratios under 15. We focused on companies trading in industries that are traditionally saturated by value companies. These industries include consumer staples, financials, industrials, and materials. From the resultant dataset we picked 16 stocks with the highest number of hedge fund investors. We gauged hedge fund sentiment using Insider Monkey’s database of 910 hedge funds.
16. Unilever Plc (NYSE:UL)
Number Of Hedge Fund Investors: 21
With a dividend yield of 3.8%, Unilever Plc (NYSE:UL) is one of the top defensive plays in the current market, thanks to Unilever Plc's (NYSE:UL) diversified business.
As of the end of the third quarter, 21 hedge funds tracked by Insider Monkey reported having stakes in Unilever Plc (NYSE:UL).
15. Altria Group Inc. (NYSE:MO)
Number Of Hedge Fund Investors: 40
Altria Group Inc. (NYSE:MO) is one of the most suitable consumer defensive stocks to buy and hold during troubled economic times, thanks to Altria Group Inc.’s (NYSE:MO) impressive dividend growth history.
As of the end of the third quarter of 2023, 40 hedge funds tracked by Insider Monkey had stakes in Altria Group Inc. (NYSE:MO). The most significant stakeholder of Altria Group Inc. (NYSE:MO) was Harris Associates’ Natixis Global Asset Management
14. Ford Motor Co. (NYSE:F)
Number Of Hedge Fund Investors: 43
Ford ranks 14th in our list of the most undervalued value stocks to buy according to hedge funds. Ford recently reported its US sales for November. Ford Motor Co. (NYSE:F) sold 145,559 vehicles in the month, a slight decline as compared to November 2022.
As of the end of the third quarter of 2023, 43 hedge funds in the database of Insider Monkey reported owning stakes in the car company. The biggest stakeholder of Ford Motor Co. (NYSE:F) during this period was Ken Fisher’s Fisher Asset Management which had a $691 million stake in Ford Motor Co. (NYSE:F).
Here is what Leaven Partners has to say about Ford Motor Company (NYSE:F) in its Q3 2022 investor letter:
In our last quarterly letter, I briefly mentioned that the consensus estimates for corporate profits appeared to be a bit too sanguine. I referenced a Reuters article that reported, as of June 17, Wall Street expected S&P 500 earnings to grow by 9.6% in 2022, which was up from 8.8% in April and from 8.4% in January. That tune began to change at the end of July and accelerated in August and September, as major players, such as Ford (NYSE:F), has recently issued profit warnings and/or have withdrawn guidance. In response, Wall Street has altered its outlook: lowering third-quarter profit growth to 4.6%[2] from 7.2% in early August and slashing full-year profit growth to 4.5%.
13. Lamb Weston Holdings Inc (NYSE:LW)
Number Of Hedge Fund Investors: 46
American food processing company Lamb Weston Holdings Inc (NYSE:LW) ranks 13th in our list of the most undervalued value stocks to buy according to hedge funds. Lamb Weston in October posted strong fiscal Q1 results and gave guidance. In the fiscal first quarter, Lamb Weston Holdings Inc (NYSE:LW) posted adjusted EPS of $1.63 beating estimates by $0.55. Revenue in the period increased by 47.8% year over year to $1.67 billion, surpassing estimates by $60 million. For fiscal 2024 Lamb Weston Holdings Inc (NYSE:LW) expects net sales in the range of $6.8 billion to $7 billion.
In its fiscal Q1 earnings call Lamb Weston Holdings Inc (NYSE:LW) talked about its guidance and expectations:
“While the overall potato category continues to be solid, due to the timing of contract openers, we are targeting our full year volume excluding acquisitions to be down mid-single-digits compared with the prior year. And we expect year-over-year volume trends will continue to improve as the year progresses, as we lap some of the significant low-margin, low product profit volume that we chose to exit in the second half of last year and as we gradually backfill the exited lower-margin business with more profitable business.
For earnings, we’ve raised our adjusted EBITDA target by about $90 million to $1.54 billion to $1.62 billion, up from our previous estimate of $1.45 billion to $1.525 billion. Using the midpoint of this updated range implies growth of about 26%, or about $330 million versus the prior year. We left our target for SG&A unchanged at $765 million to $775 million. While our first quarter run rate suggests a lower target, we continue to anticipate spending will build as the year progresses. We reduced our interest expense target by $10 million to $155 million as we expect to partially offset cash interest with more capitalized interest associated with our capacity expansions. Our other financial targets remain the same, including depreciation and amortization expense of approximately $325 million and capital expenditures of $800 million to $900 million.”
Read the full earnings call transcript here.
The London Company Small-Mid Cap Strategy made the following comment about Lamb Weston Holdings, Inc. (NYSE:LW) in its first quarter 2023 investor letter:
“Lamb Weston Holdings, Inc. (NYSE:LW) -LW’s outperformance was driven by solid quarterly results, which included double-digit pricing actions, healthy demand, and higher productivity. Productivity savings helped generate higher incremental margins and the company should drive margins higher as input costs normalize. The fry attachment rate remains above pre- pandemic levels. This is a consolidated industry and the long- term outlook remains very favorable. We remain attracted to LW’s market share, pricing power, and industry tailwinds.”
As of the end of the third quarter of 2023, 46 hedge funds reported owning stakes in the company, as per Insider Monkey’s database. The most significant stakeholder of the firm was
12. Caterpillar Inc (NYSE:CAT)
Number Of Hedge Fund Investors: 50
Caterpillar Inc (NYSE:CAT) ranks 12th in our list of the most undervalued value stocks to buy according to hedge funds.
A total of 50 hedge funds out of the 910 funds tracked by Insider Monkey reported owning stakes in Caterpillar Inc (NYSE:CAT). The most significant stakeholder of Caterpillar Inc (NYSE:CAT) was Ken Fisher’s Fisher Asset Management which owns a $2.2 billion stake in Caterpillar Inc (NYSE:CAT).
In October Caterpillar Inc (NYSE:CAT) posted strong Q3 results. Adjusted EPS in the period came in at $5.52, beating estimates by $0.73. Revenue in the period increased by 12% year over year to $16.8 billion, surpassing estimates by $240 million.
Diamond Hill Large Cap Strategy made the following comment about Caterpillar Inc. (NYSE:CAT) in its Q3 2023 investor letter:
“Caterpillar Inc. (NYSE:CAT), the world’s leading manufacturer of construction and mining equipment, also performed well this quarter. Caterpillar has managed to leverage increased capital investment from various end markets, contributing to better than expected fiscal results for Q2. The company is poised to be one of the largest beneficiaries of several government funding initiatives, including the IRA (Inflation Reduction Act) bill, CHIPS Act and infrastructure bill. These measures are expected to support construction spending for several years, providing a robust backdrop for Caterpillar’s continued growth.”
11. Builders Firstsource Inc (NYSE:BLDR)
Number Of Hedge Fund Investors: 53
Ranking 11th in our list of the most undervalued value stocks to buy according to hedge funds is Texas-based building materials Builders Firstsource Inc (NYSE:BLDR). Earlier this month Builders Firstsource Inc (NYSE:BLDR) held an investor event and provided guidance for the long term. It expects net sales to be around $21.2 billion to $21.8 billion by 2026.
Insider Monkey’s database of 910 hedge funds shows that 53 hedge funds had stakes in Builders Firstsource Inc (NYSE:BLDR) as of the end of the third quarter. The biggest stake in Builders Firstsource Inc (NYSE:BLDR) belongs to Cliff Asness’s AQR Capital Management which owns a $196 million stake in Builders Firstsource Inc (NYSE:BLDR).
Black Bear Value Partners made the following comment about Builders FirstSource, Inc. (NYSE:BLDR) in its Q3 2023 investor letter:
“Builders FirstSource, Inc. (NYSE:BLDR) is a manufacturer and supplier of building materials with a focus on residential construction. Historically this business was cyclical with minimal pricing power as the primary products sold were lumber and other non-value-add housing materials. Since the GFC, BLDR has focused on growing their value-add business that is now 40%+ of the topline. The company has modest leverage and has been using their abundant free-cash-flow to buy in over 30% of the stock in the last 18 months.
While mortgage rates are higher, they are not unusual versus history. The low rates of the last 5-10 years are the outlier. We have a structural shortage of housing in the USA. With existing homeowners locked into low-rate mortgages, the aspiring homeowner may increasingly need to find a home from a homebuilder. The next 6-12 months could be rocky as people adjust to the increase in pricing and rates. Eventually the housing market should adjust to the new normal (or rates could go down).
The company has realized sustained higher gross margins as they have gained scale. I am now giving them credit for some increased margin and raised my normalized free-cash-flow per share to $13-$17 per year. At quarter end pricing of ~$124 that implies a free-cash-flow yield of 10-14%.”
10. Delta Air Lines, Inc. (NYSE:DAL)
Number Of Hedge Fund Investors: 53
With a PE ratio of 7.3, Delta Air Lines ranks 10th in our list of the most undervalued value stocks to buy according to smart money investors. In October Delta Air Lines, Inc. (NYSE:DAL) posted third quarter results. Adjusted EPS in the period came in at $2.03, beating estimates by $0.08. Revenue in the quarter jumped 10.8% year over year to $15.49 billion, surpassing estimates by $360 million.
Insider Monkey’s proprietary database of 910 hedge funds shows that 53 hedge funds had stakes in Delta Air Lines, Inc. (NYSE:DAL).
Patient Capital Management made the following comment about Delta Air Lines, Inc. (NYSE:DAL) in its Q3 2023 investor letter:
“Airlines returned to trough multiples as higher oil prices pressured costs. Historically, airlines have passed these costs on to customers. We think Delta Air Lines, Inc. (NYSE:DAL) is a premium brand valued like its economics aren’t sustainable. With mid-teens returns on capital, significant free cash flow generation, excellent capital allocation and long-term earnings per share growth in the high-single to low-double-digits, we think the company is significantly mispriced.
Delta Air Lines Inc. (DAL) reversed course in the third quarter, falling 24% from its highs in July. The airlines in general were hurt from rising commodity prices that are leading to increased cost per available seat mile (CASM). Historically, airlines have passed on higher fuel prices to customers with a lag. We see Delta as a premium global consumer brand that is materially misunderstood by the market. The market still sees airlines as a cyclical, bankruptcy prone industry. An improved supply-demand picture, management discipline and a better business mix make Delta a more resilient business. Their loyalty program with American Express is a source of stable and growing revenues with $6.5B in remunerations this year with a goal of reaching $10B by the end of the contract in 2028. Premium and ancillary service revenue should generate 65-70% of the total in the next year or two. The company should continue to generate consistent mid-teens returns on capital. As the market begins to understand, we believe the company will continue to be rewarded. On top of this, free cash flow is expected to expand generating a cumulative ~$11B from ’23-’25, or one-half of its current market cap. As the company pays down debt while growing the dividend and eventually resuming share repurchases, we think the stock will continue to trend higher.”
9. Aercap Holdings N.V. (NYSE:AER)
Number Of Hedge Fund Investors: 54
Aviation company Aercap Holdings N.V. (NYSE:AER) is one of the most undervalued value stocks to buy according to smart money investors. As per Insider Monkey’s database, 54 hedge funds reported owning stakes in Aercap Holdings N.V. (NYSE:AER) as of the end of the September quarter. The biggest stakeholder of Aercap Holdings N.V. (NYSE:AER) was Boykin Curry’s Eagle Capital Management which had an $818 million stake in Aercap Holdings N.V. (NYSE:AER).
During the third quarter the company’s adjusted EPS came in at $2.81, beating estimates by $0.42. Revenue increased by 9.9% year over year to $1.89 billion, beating estimates by $10 million. Aercap Holdings N.V. (NYSE:AER) also upped its 2023 adjusted EPS guidance.
8. Deere & Co (NYSE:DE)
Number Of Hedge Fund Investors: 55
Agricultural machinery company Deere & Co (NYSE:DE), mostly commonly known as John Deere, has seen its share price decline by 14% year to date through December 6. However, last month Deere & Co (NYSE:DE) posted strong fiscal Q4 results. GAAP EPS in the quarter came in at $8.26, beating estimates by $0.85. Revenue in the period fell by 0.8% year over year to $15.41 billion, beating estimates by $1.75 billion.
7. Lennar Corp (NYSE:LEN)
Number Of Hedge Fund Investors: 63
Insider Monkey’s database of 910 hedge funds shows that 63 hedge funds had stakes in home construction company Lennar Corp. (NYSE:LEN) as of the end of the third quarter of 2023. The biggest stakeholder of Lennar Corp. (NYSE:LEN) was Edgar Wachenheim’s Greenhaven Associates which owns a $1 billion stake in Lennar Corp. (NYSE:LEN).
6. D.R. Horton, Inc. (NYSE:DHI)
Number Of Hedge Fund Investors: 64
Home construction company D.R. Horton, Inc. (NYSE:DHI) ranks 6th in our list of the most undervalued value stocks to buy according to hedge funds. A total of 64 hedge funds out of the 910 funds tracked by Insider Monkey were long D.R. Horton, Inc. (NYSE:DHI) as of the end of the third quarter. Last month D.R. Horton, Inc. (NYSE:DHI) posted fiscal Q4 results. GAAP EPS in the quarter came in at $4.45, surpassing estimates by $0.52. Revenue increased by 19.3% year over year to $10.5 billion, beating estimates by $480 million.
The D.R. Horton, Inc.'s (NYSE:DHI) executives talked about guidance and expectations in fiscal Q4 earnings call:
“As we look forward to the first quarter of fiscal 2024, we expect challenging market conditions to persist with continued uncertainty regarding mortgage rates, the capital markets and general economic conditions that may significantly impact our business. In our December quarter, we currently expect to generate consolidated revenues of $7.4 billion to $7.6 billion and homes closed by our homebuilding operations to be in the range of 18,500 to 19,000 homes. We expect our home sales gross margin in the first quarter to be approximately 23.7% to 24.2% and homebuilding SG&A as a percentage of revenues in the first quarter to be around 7.7% to 7.9%. We anticipate a financial services pre-tax profit margin of between 20% and 25%, and we expect our income tax rate to be in the range of 24% to 24.5% in the first quarter.
We are well positioned to continue consolidating market share in both our home building and rental operations. Our fiscal 2024 home closings volume, pricing, and margins in our homebuilding, rental, financial services, and Forestar businesses will be determined by market conditions and our efforts to meet the market by balancing pace and price to maximize returns. For the full year of fiscal 2024, we expect to generate consolidated revenues of approximately $36 billion to $37 billion and homes closed by our homebuilding operations to be in the range of 86,000 to 89,000 homes. We forecast an income tax rate for fiscal 2024 in the range of 24% to 24.5%. We expect to generate approximately $3 billion of cash flow from our homebuilding operations.”
Read the full earnings call transcript here.
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Disclosure. None. 16 Most Undervalued Value Stocks To Buy According To Hedge Funds was initially published on Insider Monkey.