Today’s AI-fueled era of the “Magnificient Seven” technology stocks is dominating the US stock market. However, investing with a focus on value stocks hasn’t lost its popularity. In March, a Bloomberg report detailed how many investment firms were pouring money into value stocks, primarily in sectors like energy, financials, utilities, and materials.
Among the various investors preferring these sectors, Nanette Abuhoff Jacobson, global investment strategist of Hartford Funds, who liked stocks from these “unloved sectors,” made the list. The Bloomberg report also mentioned Presilium Private Wealth, which found value investing to be attractive in the current environment.
During the 2024 Sohn Investment Conference, billionaire David Einhorn claimed that it was a great time to be a value investor, while also continuing to say that value investing is dead as an industry. When asked about these contradictory statements, he said that the value investing industry and value investing as an investing strategy are two distinct things.
Many fund managers who were paid heavily by people to research undervalued stocks for them have lost their jobs and assets under management amid a shift to index funds where “millions of dollars were redeemed” out of those conventional strategies. But Einhorn said that this development has decreased the competition in the industry, paving the way for people like him to be in a unique position to find undervalued stocks.
Are Value Stocks a Better Choice Than Growth Stocks?
On August 16, Vahan Janjigian, CIO at Greenwich Wealth Management, joined “The Exchange” on CNBC to discuss why value stocks may perform better than growth stocks in a low-rate environment. Broadly speaking, investors seem to think that lower interest rates are better for growth stocks as compared to value stocks. Janjigian believes that it also depends upon the shape of the yield curve. With the economy stabilizing and the Fed cutting interest rates, the yield curve can potentially normalize. He says that this happening can prove better for value stocks that pay good dividends than for growth stocks that do not pay dividends.
Janjigian also says that although he invests in other stocks through ETFs, he tends to be a value investor, favoring value stocks that pay good dividends and have been growing over time. He named three of his favorites, which include Pfizer, Verizon, and IBM. Viewing these stocks as substitutes for bonds, he reflects on the similarities between the two, claiming that they are long-term investments with very good yields.
Dave Sekera, Morningstar’s Chief U.S. Market Strategist, said that the best value is in the small cap category. In a CNBC interview in August, he said that the small-cap category trades at a 15% discount to their fair value, highlighting stocks like Kraft Heinz that looked like attractive investments.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded companies with market caps between $1 billion and $10 billion (our definition of small caps) and forward P/E ratios of less than 15 as of October 1, 2024. From this list, we selected the 7 stocks with the highest number of hedge funds holders as of Q2 2024, and used that as our ranking metric. We gave preference to stocks that come from sectors like consumer, healthcare, energy, materials, and utilities.
Why are we interested in the stocks that hedge funds pile into? 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).
7 Best Small-Cap Value Stocks to Buy According to Hedge Funds
7 Best Small-Cap Value Stocks to Buy According to Hedge Funds
Chord Energy (NASDAQ:CHRD) is an independent production and exploration company specializing in acquiring, developing, and producing natural gas liquids (NGL), natural gas, and crude oil. Its operations are concentrated in the Montana and North Dakota areas of the Williston Basin, targeting the Three Forks and Middle Bakken formations. The company’s land position stretches across approximately 1.3 million net acres in the Williston Basin, which is around 98% of the region.
Chord Energy (NASDAQ:CHRD) has an average daily production of 287,000 net barrels of oil equivalent per day (Boepd). It sells its natural gas, NGL, and crude oil production to marketers, refiners, and other purchasers with access to nearly rail and pipeline facilities. The company’s Q2 2024 oil volumes stood at the top end of guidance, primarily due to less downtime and well performance.
It completed the acquisition of Enerplus on May 31, and the strategic and financial benefits of the transaction are giving the company an attractive appeal. Enerplus integration brings top-tier assets in the basin core to the company. Chord Energy (NASDAQ:CHRD) is attempting to increase returns on these assets by applying techniques it developed over the past years, including reducing downtime, optimizing spacing, and longer laterals. The combined asset base holds the potential to support strong returns, efficient operations, sustainable free cash flow, and a peer-leading return of the capital program. This positions the company to achieve the greater than $200 million synergies target, up from the original estimate of $150 million.
The company holds a competitive advantage due to the evolving nature of the Williston Basin, which has the highest oil cut and its footprint extending across almost the entirety of the play. The land and regulatory environment are additional benefits in the region, positioning Chord Energy (NASDAQ:CHRD) for greater growth and profitability.
Overall, CHRD ranks first among the 7 best small-cap value stocks to buy according to hedge funds. While we acknowledge the potential of CHRD as an investment, 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 an AI stock that is more promising than CHRD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
