10 Best Undervalued Small-Cap Stocks According to Hedge Funds
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In this article, we discuss the 10 best undervalued small-cap stocks according to hedge funds. If you want to read about some more undervalued stocks popular among hedge funds, go directly to 5 Best Undervalued Small-Cap Stocks According to Hedge Funds.
On February 4, a former governor of the Federal Reserve, Lawrence Lindsey, appeared on news platform CNBC to warn viewers that higher inflation will force consumers to limit spending by so much that the economy would likely fall into recession by the summer of 2022. Lindsey was of the opinion that the central bank of the United States was “nowhere close” to being able to tackle the growing inflation. According to the former Fed governor, consumer spending would fall by about 2 benchmark points in the coming months, a “shock” that could trigger a recession.
Even as a recession looms, the US job market is booming. Latest data from the Labor Department indicates that the labor market added 431,000 jobs in March, sending the unemployment rate to 3.6%, a new low since the crash of March 2020. In the past six months, the US economy has added jobs at a monthly average of over 600,000. This unprecedented growth raises questions about sustainability given that inflation has soared to four-decade highs in the meanwhile.
In an annual letter to shareholders released on April 4, Jamie Dimon, the chief of investment bank JPMorgan Chase & Co. (NYSE:JPM), also warned about the risks that the US economy faced, noting that a sustained increase in interest rates by the Fed would “cause lots of consternation and very volatile markets”. Simon said that the unpredictability of the war combined with the problems in the global commodity supply chains made for a potentially “explosive situation” in the coming months.
As COVID-linked federal aid stops, the savings of the pandemic dwindle, and interest rates rise after years, consumer spending patterns are slowing. The markets are likely to become more volatile as investors look for high-income firms to cover their riskier growth bets. In this scenario, some of the best undervalued stocks to buy according to hedge funds include Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), and StepStone Group Inc. (NASDAQ:STEP), among others discussed in detail below.
Our Methodology
These were picked using the Price-to-Earning (PE) ratios and market capitalizations. Stocks that have a PE ratio of around 15 and a market capitalization between $300 million to $2 billion were preferred for the list. The business fundamentals and analyst ratings of each company are also discussed to provide some additional context.
Hedge fund sentiment was included as a classifier as well. Data from around 900 elite hedge funds tracked by Insider Monkey was used to identify the number of hedge funds that hold stakes in each company.
Best Undervalued Small-Cap Stocks According to Hedge Funds
10. Delek Logistics Partners, LP (NYSE:DKL)
Number of Hedge Fund Holders: 2
PE Ratio: 12.15
Delek Logistics Partners, LP (NYSE:DKL) is an oil and gas storage and transportation firm. The company has an impressive dividend history with eight consecutive years of dividend growth. The sector median in this regard is just one year. On January 21, the firm declared a quarterly dividend of $0.975 per share, an increase of 2.6% compared to the previous dividend of $0.950. The forward yield was 9.12%. Other earnings metrics are also solid as the firm recently beat market estimates on revenue for the fourth quarter of 2021 by $4.3 million.
As inflation wreaks havoc with the market, Delek Logistics Partners, LP (NYSE:DKL) is a reliable earnings king with a high yield that is trading at cheaper prices in the market compared to peers. It is also expected to grow payouts by 5% in 2022.
At the end of the fourth quarter of 2021, 2 hedge funds in the database of Insider Monkey held stakes worth $1.8 million in Delek Logistics Partners, LP (NYSE:DKL), compared to 1 in the previous quarter worth $939,000.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Delek Logistics Partners, LP (NYSE:DKL) with 28,151 shares worth more than $1.2 million.
Just like Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), JPMorgan Chase & Co. (NYSE:JPM), and StepStone Group Inc. (NASDAQ:STEP), Delek Logistics Partners, LP (NYSE:DKL) is one of the stocks that elite investors have on their radar.
9. Brinker International, Inc. (NYSE:EAT)
Number of Hedge Fund Holders: 35
PE Ratio: 11.39
Brinker International, Inc. (NYSE:EAT) owns and runs casual dining restaurants. The stock has been given a major boost in the past few weeks as the pandemic headwinds recede and investors turn their focus back on the economic recovery. The earnings results of the firm in the fourth quarter of 2021, posted in late February, have given a further boost to the shares. The company beat market estimates on earnings per share and revenue during the fourth quarter by $0.20 and $1.51 million respectively.
On February 2, Stephens analyst James Rutherford maintained an Overweight rating on Brinker International, Inc. (NYSE:EAT) stock and raised the price target to $53 from $45, noting that the staffing of the firm was “on a good trajectory” with applicant flow up meaningfully and retention improving.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Brinker International, Inc. (NYSE:EAT) with 1.2 million shares worth more than $45 million.
At the end of the fourth quarter of 2021, 35 hedge funds in the database of Insider Monkey held stakes worth $185 million in Brinker International, Inc. (NYSE:EAT), compared to 31 in the previous quarter worth $284 million.
8. EnPro Industries, Inc. (NYSE:NPO)
Number of Hedge Fund Holders: 10
PE Ratio: 11.20
EnPro Industries, Inc. (NYSE:NPO) markets engineered industrial products. The firm has recently sold off the only major asset it held in the oil and gas sector, generating $195 million from the sale of Compressor Products International to Howden Group. Flush with the cash, the firm has also increased the dividend payout by 4% to $0.28 per share. In the fourth quarter of 2021, the earnings of the company have beat market expectations too. EnPro is also investing in the semiconductor business as part of a business diversification plan.
EnPro Industries, Inc. (NYSE:NPO) remains on track to deliver in the heavy trucks and auto industries. However, the transition to chips would help the company with profits and better margins, decreasing reliance on the cyclical industrial business.
At the end of the fourth quarter of 2021, 10 hedge funds in the database of Insider Monkey held stakes worth $231 million in EnPro Industries, Inc. (NYSE:NPO), the same as in the previous quarter worth $193 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm GAMCO Investors is a leading shareholder in EnPro Industries, Inc. (NYSE:NPO) with 1 million shares worth more than $117 million.
7. Bloomin’ Brands, Inc. (NASDAQ:BLMN)
Number of Hedge Fund Holders: 40
PE Ratio: 10.58
Bloomin’ Brands, Inc. (NASDAQ:BLMN) owns and runs fine dining restaurants. On February 18, the share price jumped over 10% after the firm posted earnings for the fourth quarter of 2021, reporting a revenue of more than $1 billion, up 29% year-on-year and beating consensus estimates by $10 million. The firm also reported that comparable restaurant sales had increased 27.9% year-on-year in 2021 and the operating margins were up to 16.5% compared to just under 12% in 2020.
On February 22, Raymond James analyst Brian Vaccaro kept a Strong Buy rating on Bloomin’ Brands, Inc. (NASDAQ:BLMN) stock and raised the price target to $30 from $28, appreciating the “strong” earnings and “solid” guidance of the firm in the fourth quarter of 2021.
At the end of the fourth quarter of 2021, 40 hedge funds in the database of Insider Monkey held stakes worth $362 million in Bloomin’ Brands, Inc. (NASDAQ:BLMN), up from 37 the preceding quarter worth $623 million.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Tremblant Capital is a leading shareholder in Bloomin’ Brands, Inc. (NASDAQ:BLMN) with 3.6 million shares worth more than $75 million.
6. Banner Corporation (NASDAQ:BANR)
Number of Hedge Fund Holders: 9
PE Ratio: 9.95
Banner Corporation (NASDAQ:BANR) operates as a bank holding firm. The company has paid a dividend to shareholders consistently for the past two decades. The sector median in this regard is just 13 years. On January 20, it declared a quarterly dividend of $0.44 per share, an increase of over 7% compared to the previous dividend of $0.41 per share. The forward yield was 2.81%. The shares have also been given a boost by a recent company decision to repurchase at least 5% of the common stock.
On January 28, Raymond James analyst David Long kept a Strong Buy rating on Banner Corporation (NASDAQ:BANR) stock and raised the price target to $72 from $68, highlighting that the “underpinnings of accelerating growth” were visible for the firm given continued strong originations.
At the end of the fourth quarter of 2021, 9 hedge funds in the database of Insider Monkey held stakes worth $44 million in Banner Corporation (NASDAQ:BANR), compared to 12 in the preceding quarter worth $42 million.
Among the hedge funds being tracked by Insider Monkey, Arkansas-based investment firm Forest Hill Capital is a leading shareholder in Banner Corporation (NASDAQ:BANR) with 290,788 shares worth more than $17.6 million.
In addition to Verizon Communications Inc. (NYSE:VZ), Vista Outdoor Inc. (NYSE:VSTO), JPMorgan Chase & Co. (NYSE:JPM), and StepStone Group Inc. (NASDAQ:STEP), Banner Corporation (NASDAQ:BANR) is one of the stocks that hedge funds are monitoring.
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Disclosure. None. 10 Best Undervalued Small-Cap Stocks According to Hedge Funds is originally published on Insider Monkey.
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