We recently published a list of 10 Best Falling Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where NOV Inc. (NYSE:NOV) stands against other best falling stocks to buy according to hedge funds.
Are The S&P 500 Gains Coming Towards An End?
Analysts at Goldman Sachs on October 21st released a note forecasting that the S&P 500 average annual return of 13% for the past 10 years might come down to just 3% for the next decade. The estimates by Goldman Sachs are far below Wall Street’s estimates as analysts on Wall Street expect the index performance to range from 4.4% to 7.4%, with an average of 6%.
Analysts at Goldman Sachs based their forecast on the concern that market concentration within the S&P 500 has been at a record high in its 100-year history. They mentioned that the top 10 largest stocks of the index currently account for more than 36% of the overall index. These top 10 constituents of the index have increased in size due to exceptional earnings growth over the past 2 years. The Magnificent Seven alone have at least doubled their earnings year-over-year during the first quarter of fiscal 2024.
However, analysts at the firm believe that historical evidence shows it is extremely challenging for companies to sustain high levels of sales growth and profit margins for more than a decade. They also noted that the sales growth of the Magnificent Seven has already started to fall from the accelerated pace of their growth during the past 2 years.
On the bright side, analysts pointed out that growth is expected to pick up for the remaining stocks on the index. They expect double-digit earnings growth for these remaining 493 stocks over the next 5 quarters.
Sylvia Jablonski, Defiance ETFs CEO and CIO joined CNBC on October 22 for an interview to talk about the earnings season progress and also shared her point of view regarding the recent note from Goldman Sachs. She noted that we have seen around 14% of the S&P 500 that have reported their earnings and, out of those, 79% beat expectations. She thinks this is a solid start to the earnings season. Jablonski also mentioned that the bar for some of the companies has also come down, for instance in July analysts were talking about 6% to 7% year-over-year growth, and now we are looking at around 5% growth and companies have been achieving it for the most part.
While talking about Goldman Sachs’s recent note, she mentioned that the shrink in annual return by the index depends on a few factors. While the valuations are high, the earnings are strong and profits are also growing, thereby the high valuations have started to feel justified. However, it only remains justified until the valuations become lofty again. Jablonski pointed out that while the Magnificent Seven stocks have been the top performers of the last decade, we are going to see a broadening of the market where the performance would come from the remaining stocks in the index. She thinks that this transition of growth from the top constituents of the index to smaller stocks might affect the annual returns. However, AI is going to drive the index for the next 5 to 10 years. Jablonski mentioned utility facilities and energy sector companies having grown in triple digits due to artificial intelligence.
Lastly, Jablonski clarified that she is not bearing on tech or semiconductors but the leaders in the S&P 500 are expected to change with Magnificent Seven slowing down in terms of the stellar growth they have posted in the past.
Our Methodology
To curate the list of the 10 best falling stocks to buy according to hedge funds, we used the Finviz stock screener and Yahoo Finance. We defined falling stocks as those trading within 0% to 3% of their 52-week lows. Using the Finviz stock screener, we got an aggregated list of stocks that fit our criteria. Next, we ranked these stocks based on the number of hedge funds holding each stock during Q2 2024, as per Insider Monkey’s database. All indicators were recorded on October 21st, 2024. Please note that the list is ranked in ascending order of the number of hedge funds.
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).
NOV Inc. (NOV): Hedge Funds Bet on Energy Equipment Leader Amid Market Lows
An engineer inspecting a complete set of oil and gas components.
First on our list of the 10 best-falling stocks to buy according to hedge funds is NOV Inc. (NYSE:NOV). Although it is currently trading close to its 52-week low, 29 hedge funds had stakes in the company in Q2 2024, amounting to $1.34 billion, as per Insider Monkey’s database.
It operates in the energy industry, where the company designs and manufactures large machinery and systems necessary for drilling oil and gas. Its machinery can extract oil and gas from both onshore and offshore locations. Moreover, the company also provides equipment for post-drilling maintenance of the wells. It helps drilling companies rent out heavy machinery rather than having to buy it outright.
The rising adoption of NOV Inc’s (NYSE:NOV) technologies resulted in increasing market share for the company, with international markets comprising 62% of the total revenue during the second quarter of fiscal 2024. Both Energy Product and Services revenue and Energy Equipment Revenue were up 2% and 8%, respectively, year-over-year, offsetting the softness in the North American market.
Overall the revenue of the company grew 6% during the same time to reach $2.2 billion during the second quarter. The company also generated a significant net income of $226 million which was up by almost $71 million year-over-year.
What’s more impressive is its free cash flow generation which came in at $350 million for the quarter with an operating cash flow of $432 million. This indicates that the company has maintained its strong position internationally and that softening in the North American market is not affecting its profitability.
Ariel Appreciation Fund stated the following regarding NOV Inc. (NYSE:NOV) in its Q3 2024 investor letter:
“Alternatively, drilling and production equipment provider, NOV Inc. (NYSE:NOV) weighed on returns over the period despite the company’s solid business fundamentals. NOV delivered a top- and bottom-line earnings beat, highlighted by rising demand in offshore and international markets, strong backlog order conversion, effective cost controls and robust free cash flow generation. Although a softening oil outlook in North America drove management to modestly lower full year guidance, the company continues to return capital to shareholders through a recent 50% dividend hike and $1 billion share repurchase authorization. As NOV right-sizes its onshore business and grows a more efficient offshore business, we believe the market will recognize the long-term value and re-rate the shares.”
Overall, NOV ranks 10th on our list of best falling stocks to buy according to hedge funds. While we acknowledge the potential of NOV to grow, 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 a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
