In this article, we present to you the 15 Best Undervalued Stocks to Buy Now. If you’re in a hurry, click to skip ahead and jump to the 5 Best Undervalued Stocks to Buy Now.
Investing in the stock market could be difficult. We can classify investors based on their portfolios. The low risk-takers who prefer investing in high dividend-paying stocks (see 15 Best Dividend Stocks with Upside Potential) and the high-risk takers, investors who are more eager to invest in falling knife stocks. Falling knife stocks are the stocks that may fall +50% in a month or +80% in six months. They are the category of stocks that have undergone a rapid decline in share price in a short amount of time.
The term “catching a falling knife” is popular for investors who attempt to buy a stock at its lowest point and hold on to it as it rises again. When a company’s share price has fallen significantly making it appear to be undervalued, most investors would consider this as an opportunity to purchase the stock before it rebounds to generate capital appreciation. Based on a study by Brandes Institute, falling knife stocks in the United States posted an average annual outperformance of 7.1% if the stocks were held for 3 years.
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Falling knives belong to a volatile market where whipsaw is not distant and a rebound in most of these stocks are likely. It is important for investors to analyze the possibility of these stocks to post a profit. According to Deutsche Bank research,
“When a stock falls, there are of course reasons. For example, a stock’s price can plunge if the company must report falling profits or is rocked by a scandal. Instead of grasping blindly at falling knives, investors should first analyze carefully what the prospects are of the company posting profits again soon,”
For instance, in December 2013, Luluemon (LULU) shares dropped nearly 20% overnight after investors received bad news from the company. In June 2014, after more bad news, the company’s stocks fell 15%. After a few months in a relatively tight trading range, LULU regained consistency. Investors who caught the falling knife in June 2014 had a 75% gain by March 2015. Today, LULU is one of the 12 Best Fitness Stocks to Buy Now and as of January 14, 2020, the stock price is at $353.
In a study conducted by Brandes Institute in 2018, the falling knife stocks in the U.S. posted an annualized 11.2% over 3 years, compared to the 4.6% return of the S&P 500. The average outperformance of U.S. falling knife stocks was 6.6%. The healthcare sector posted the biggest outperformance over 3 years: 12.2% annually.
The pandemic resulted in many investors gaining interest in catching a falling knife stock but it is important to be cautious in investing in these stocks. According to a great study by J.P. Morgan, 40% of all stocks experience a catastrophic decline from which they never recover. Before investing in falling knives, analyze the company’s financial health, observe if the situation is a temporary setback, and would later rebound and generate gains.
In order to identify the 15 best undervalued stocks to buy now, we started with holdings in the Direxion Fallen Knives ETF (NIFE) and we were able to narrow down our list to 15 stocks by using our hedge fund sentiment scores.
Our in-house analysis shows that we can use the sentiment information gathered from the hedge fund filings to classify in advance a select group of stocks that can beat the S&P 500 index by double digits annually on average. For instance, the portfolio of our monthly newsletter’s stock picks has beaten the market by over 88 percentage points since March 2017 (see the details here). Some of the portfolio holdings of our monthly newsletter have been shared publicly too. In October, we shared this real estate stock and since then, it’s been up nearly 50 percent. Just a few days ago we published the newest issue of our monthly newsletter and shared our favorite fallen knife stock. We believe this stock will double in the next 12-18 months and return 200% over the next 2-3 years.
Based on our hedge fund sentiment data, we now present to you the 15 best undervalued stocks to buy now based on the stock picks of 800+ hedge funds tracked by Insider Monkey:
15. Western Alliance Bancorp (NYSE:WAL)
No of HFs: 28
Total Value of HF Holdings: $125 Million
After the Federal Reserve announced its commitment to keeping interest rates low, bank stocks suffered. During March 2020, WAL shares dropped 15% after interest rates fell sharply to historic lows. However, CEO Kenneth A Vecchione mentioned that they are well prepared to survive the downturn.
“We arrive here uniquely prepared to address what's ahead. As we all experience the pressure that the COVID-19 pandemic has caused around the world, the people at Western Alliance remain actively engaged and are focused on helping our clients navigate through this challenging time."
The top hedge fund holder of this stock is Phill Gross and Robert Atchinson’s Adage Capital Management, which had $25 million invested in the stock at the end of September. An insider purchased 10,000 shares at around $32. The stock is up more than 109% since then.
14. Pacwest Bancorp (NASDAQ:PACW)
No of HFs: 28
Total Value of HF Holdings: $247 Million
Pacwest Bancorp ranks 14th in our list of the best undervalued stocks to buy now. PACW is a bank holding company that specialized in financial and banking solutions. During the third quarter of 2020, the company announced net earnings of $45.5 million or $0.28 per diluted share.
The top hedge fund holder of this stock is Amy Minella’s Cardinal Capital, which had $71 million invested in the stock at the end of September. An insider purchased 1,600 shares at around $16. The stock is up more than 93% since then.
13. Jazz Pharmaceuticals (NASDAQ:JAZZ)
No of HFs: 28
Total Value of HF Holdings: $1.25 Billion
Jazz Pharmaceuticals is focused on patient lives by commercializing products that address unmet medical needs. Although many investors are taking interest in biotech companies working on vaccines for COVID-19, JAZZ was having difficulty. In September, shares were down 6.9%. JAZZ reported adjusted net income of $242 million, or $4.31 a share, in September. The company expects to earn nearly $13 in 2020 and trades at a forward PE ratio of 10 according to Yahoo Finance.
The top hedge fund holder of this stock is Jim Simons’ Renaissance Technologies, which had $475 million invested in the stock at the end of September. An insider purchased 11,482 shares at around $112. The stock is up more than 44% since then.
12. Emcor Group, Inc. (NYSE:EME)
No of HFs: 29
Total Value of HF Holdings: $117 Million
EME ranks 12th in our list of the best undervalued stocks to buy now. Emcor is an engineering and construction company. EME was mentioned as one of the 10 Best Construction Materials Stocks to Buy Now. During the third quarter of 2020, the company reported an operating income of $135.49 million, $2.2 billion in revenue, and $270 million in cash flow.
The top hedge fund holder of this stock is Alexander Medina Seaver’s Stadium Capital Management, which had $53 million invested in the stock at the end of September. An insider purchased 1,000 shares at around $58. The stock is up more than 68% since then.
11. Fifth Third Bancorp (NASDAQ:FITB)
No of HFs: 30
Total Value of HF Holdings: $358 Million
FITB recently reported plans of closing 37 branches primarily in the Midwest in the first quarter of 2021. The bank is also planning an additional $100 to $150 million in cost cuts by 2022. During the third quarter of 2020, the company reported a net income of $562 million, a 6% year-over-year increase. Goldman Sachs recently upgraded FITB saying they see FITB as "an emerging operating leverage story trading at a discount to fundamental value".
The top hedge fund holder of this stock is Richard S. Pzena’s Pzena Investment Management, which had $56 million invested in the stock at the end of September. An insider purchased 1,000 shares at around $58. The stock is up more than 68% since then.
10. Momo, Inc. (NASDAQ:MOMO)
No of HFs: 30
Total Value of HF Holdings: $362 Million
The tenth best undervalued stock to buy now is MOMO according to hedge funds. The company operates a mobile-based social networking platform, offering live video, value-added, and mobile game services. MOMO shares were trading at $37 a year ago and are currently changing hands at $15.50. During the third quarter, the company reported a revenue of RMB3.77 billion, 2% ahead of the consensus. The company guided a year-over-year revenue decline of more than 20% for the fourth quarter of 2020.
The top hedge fund holder of this stock is quant hedge fund RenTech, which had $195 million invested in the stock at the end of September. The decline in year-over-year revenue isn't encouraging but RenTech is probably attracted to around $1 billion in net cash position in MOMO (according to Yahoo Finance) and its forward PE of 7. We haven't verified the accuracy of these figures but, if true, MOMO could indeed be a great stock to buy now.
9. Helmerich & Payne, Inc. (NYSE:HP)
No of HFs: 31
Total Value of HF Holdings: $165 Million
HP ranks 9th in our list of the best undervalued stocks to buy now. Helmerich & Payne, Inc. is an energy-oriented company that focused on the drilling of oil and gas wells. The company generated a revenue of $317 million versus $634 million in the previous quarter. The decrease was a result of the rig releases in the North America Solutions segment and the International Solutions segment due to energy demand destruction as a result of the pandemic. Bank of America downgraded HP about a month ago saying that "we still haven’t changed our view on where shale activity rebounds to over the longer-term, and we still don’t see the rig count rising to a level that helps margins back to prior peak levels”. Interestingly oil prices have been increasing in recent weeks despite the increase in COVID-19 cases. Crude oil is currently standing at $53 per barrel. HP needs to increase more than 75% to reclaim its 52-week high.
The top hedge fund holder of this stock is Adam Peterson’s Magnolia Capital Fund, which had $56 million invested in the stock at the end of September. An insider purchased 10,000 shares at around $20. The stock is up more than 25% since then. Here is what Palm Valley Capital said about HP in its 2020 Q1 investor letter:
“Helmerich & Payne (HP) is the number one land drilling company in the United States. Founded in 1920, Helmerich & Payne has a long history of successfully navigating through the frequent booms and busts of the energy industry. As oil and natural gas prices plummeted during the quarter, Helmerich & Payne’s stock fell sharply and traded below our calculated value of its 331 land rigs. Although we expect results to suffer in the near-term, we believe the company’s balance sheet will allow it to survive the current bust in the energy industry. As of December 31, 2019, the company had $412 million in cash and has no debt maturities until 2025.”
8. Reinsurance Group of America (NYSE:RGA)
No of HFs: 31
Total Value of HF Holdings: $258
Reinsurance Group of America ranks 8th in our list of the best undervalued stocks to buy now. RGA specializes in providing life and health-related insurance. Reinsurance Group of America's stock was trading at $160 a year ago and plunged to $55 in March during the pandemic selloff. Today, RGA shares are changing hands at $114.
The top hedge fund holder of this stock is Natixis Global Asset Management’s Harris Associated, which had $374 million invested in the stock at the end of September. An insider purchased 2,000 shares at around $144. The stock is down 21% since then. Here is what Oakmark Funds said about RGA in its 2020 Q2 letter:
“RGA primarily reinsures life insurance contracts. As the coronavirus spreads throughout the world, the company’s share price collapsed to levels that, in our view, reflected a worst-case scenario. Our discussions with management, as well as our own scenario analysis, further buttressed our assessment, and we established a position at a price well below the company’s tangible book value. RGA also maintains a conservative balance sheet, and we expect it will earn double-digit returns on tangible equity on average over time. We were excited to purchase this stock as it is trading for just a mid-single digit multiple of our estimate of normalized earnings per share.”
7. Grand Canyon Education (NASDAQ:LOPE)
No of HFs: 32
Total Value of HF Holdings: $193 Million
LOPE ranks 7th in our list of the best undervalued stocks to buy now. Grand Canyon Education offers top-quality education services. Grand Canyon Education's stock was trading at around $100 before the pandemic and lost around 40% of its value in March. "GCE is gaining real momentum as an educational services provider. We are building three platforms that will provide significant growth over the next 10 years. The pandemic has been a serious challenge for universities throughout the country and many are having financial problems," its CEO said during LOPE's Q3 earnings call. LOPE recovered most of its losses as its online courses helped the company grow its student count be 7.5% during the third quarter.
The top hedge fund holder of this stock is Scott Ferguson’s Sachem Head Capital, which had $63 million invested in the stock at the end of September. An insider purchased 200 shares at around $82. The stock is up more than 8% since then.
6. Ambarella Inc (NASDAQ:AMBA)
No of HFs: 34
Total Value of HF Holdings: $191 Million
Ambarella, Inc. is a fabless semiconductor design company that focuses on HD and Ultra HD video compression, image processing, and a wide variety of human and computer vision applications. The chips are built to provide a combination of low-power operation video compression, image processing, and computer vision performance. AMBA shares has been increasing rapidly every since the company beat the Q3 earnings expectations and issued strong guidance for Q4. The company guided for $56 to $60 million in fourth quarter revenue, vs. analyst expectations of less than $52 million.
AMBA was in 34 hedge funds’ portfolio at the end of September. Quant hedge fund RenTech owned 1.2 million shares of AMBA at the end of Q3. AMBA shares doubled since then and it may be too late to buy them cheaply.
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Disclosure: No positions. 15 Best Undervalued Stocks To Buy Now is originally published at Insider Monkey.