In this article, we discuss the 10 best undervalued large-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 Large-Cap Stocks According to Hedge Funds.
Economists have been forced to revise their growth forecasts for 2022 amid rapid inflation, soaring oil prices and global instability. However, for the first time in years, the US job market is adding hundreds of thousands jobs a month, consumer spending patterns are showing no signs of slowing down, and businesses are investing at a record rate. On April 5, Deutsche Bank became the first big finance institution to formally predict a recession, with economist Matthew Luzzetti authoring a report that predicts that a recession will begin next year.
Other market experts do not concur with this analysis. For example, Aneta Markowska, the chief economist for Jefferies, claims that although high oil prices, rising interest rates and waning government aid will all drag down growth in 2022, other economic indicators like corporate profits and households savings remained strong and debt rate low, providing a cushion against a potential slowdown. Deutsche Bank estimates for recession paint a bleaker picture, with the unemployment rate peaking at around 5% in 2024.
This is a moderate prediction for the recession compared to previous crises. For example, in the pandemic madness of March 2020, unemployment had reached nearly 15%. Back in 2009, it had peaked at around 10%. Investors preparing their portfolios for the uncertainty ahead should consider some of the best undervalued large-cap stocks to buy according to hedge funds that include Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB), among others discussed in detail below.
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 of more than $10 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 Large-Cap Stocks According to Hedge Funds
10. Hologic, Inc. (NASDAQ:HOLX)
Number of Hedge Fund Holders: 40
PE Ratio: 11.68
Hologic, Inc. (NASDAQ:HOLX) makes and sells healthcare equipment. In early February, the company beat market expectations on earnings for the fourth quarter of 2021 and raised guidance for the fiscal year 2022, saying it expected revenue to climb to around $4.6 billion against consensus estimates of just a little over $4 billion. The company also expects earnings per share to reach up to $5.20 per share this year. Analysts had estimated the earnings of the healthcare giant to be around $3.73 this year.
On February 3, Wells Fargo analyst Dan Leonard kept an Overweight rating on Hologic, Inc. (NASDAQ:HOLX) stock with a price target of $90, noting that the “growth and capital allocation opportunities” of the firm were “underappreciated at current levels”.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Millennium Management is a leading shareholder in Hologic, Inc. (NASDAQ:HOLX) with 1.3 million shares worth more than $102 million.
At the end of the fourth quarter of 2021, 40 hedge funds in the database of Insider Monkey held stakes worth $813 million in Hologic, Inc. (NASDAQ:HOLX), compared to 39 the preceding quarter worth $716 million.
Just like Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB), Hologic, Inc. (NASDAQ:HOLX) is one of the stocks that institutional investors are buying.
9. Diamondback Energy, Inc. (NASDAQ:FANG)
Number of Hedge Fund Holders: 45
PE Ratio: 11.01
Diamondback Energy, Inc. (NASDAQ:FANG) is an independent oil and natural gas firm. The company has paid a growing dividend to shareholders consistently for the past three years. On February 22, it declared a quarterly dividend of $0.60 per share, an increase of 20% from the previous dividend. The forward yield was 1.87%. The stock has been given a boost as supply concerns lift energy prices as a rally in the price of crude oil shows signs of slowing down after months. The firm beat market estimates on oil production in the fourth quarter of 2021.
On March 8, Scotiabank analyst Paul Cheng upgraded Diamondback Energy, Inc. (NASDAQ:FANG) stock to Outperform from Sector Perform and raised the price target to $160 from $145, noting that the stock had risen less compared to peers since late 2021 and thus had room to climb higher in the coming months.
Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Harris Associates is a leading shareholder in Diamondback Energy, Inc. (NASDAQ:FANG) with 3 million shares worth more than $327 million.
At the end of the fourth quarter of 2021, 45 hedge funds in the database of Insider Monkey held stakes worth $572 million in Diamondback Energy, Inc. (NASDAQ:FANG), compared to 51 the preceding quarter worth $802 million.
“Diamondback Energy, Inc. (NASDAQ:FANG) returned 14.4% in the quarter as oil price rose and fell during the quarter ending the period largely in the same place that it started. The company reported strong 3Q results beating on the top and bottom line. Diamondback Energy, Inc. (NASDAQ:FANG) reported revenue of $1.9B beating consensus of $1.5B with EPS of $2.94 beating expectations for $2.79. The beat was driven by a combination of higher volumes, higher realizations, and efficiency gains. The company increased its total production guidance for the year to 370-372mboe/d1 (up from 363-370mboe/d) while lowering Capital Expenditure (CAPEX) guidance for the second time this year to $1.49-1.53B. Diamondback Energy, Inc. (NASDAQ:FANG) raised the dividend for the third time this year to $2/share annually while authorizing a new $2B share repurchase program. Starting in 4Q21, the company plans to return 50% of Free Cash Flow to shareholders through the base dividend and a combination of buybacks and special dividends. Finally, the CEO Travis Stice announced plans to reduce methane emissions by 70% as part of the firm’s ESG initiative.”
8. Chubb Limited (NYSE:CB)
Number of Hedge Fund Holders: 34
PE Ratio: 11.02
Chubb Limited (NYSE:CB) is a Switzerland-based insurance firm. It is one of the stocks hit hardest by the Russian invasion of Ukraine. On March 31, S&P Global estimated that the specialty insurance market was expected to incur losses of around $35 billion due to the invasion and it may take years to settle the ultimate losses. As the Federal Reserve raises the interest rates, the investment portfolio of the firm should benefit. According to CEO Evan Greenberg, every 100 basis points of portfolio yield produces $1.2 billion of additional investment income for the company.
On April 4, RBC Capital analyst Mark Dwelle kept an Outperform rating on Chubb Limited (NYSE:CB) stock and raised the price target to $239 from $230, noting that the new target “rolls forward the estimated ending 2023 book value versus 2022 previously”.
At the end of the fourth quarter of 2021, 34 hedge funds in the database of Insider Monkey held stakes worth $1.7 billion in Chubb Limited (NYSE:CB), compared to 30 the preceding quarter worth $1.2 billion.
Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Viking Global is a leading shareholder in Chubb Limited (NYSE:CB) with 3.6 million shares worth more than $713 million.
In its Q4 2020 investor letter, Davis Funds, an asset management firm, highlighted a few stocks and Chubb Limited (NYSE:CB) was one of them. Here is what the fund said:
“Chubb Limited (NYSE:CB) is now among the Fund’s largest P&C holdings at 5.2% and illustrates well why we thought there was an opportunity to add to our P&C names. Through September 30, 2020, Chubb Limited (NYSE:CB) had returned −24% for the year, reflecting investors’ fears that (1) the insurance industry would be compelled to cover substantial business interruption claims that were never intended as part of insured’s policies, (2) declining long-term rates would diminish the value of “float” (i.e., customers’ funds that insurers get to hold and invest until claims are paid), and (3) adverse trends (pre-dating the pandemic) in insured loss rates (e.g., rising litigation and settlement costs, increased frequency and severity of catastrophe losses, etc.).
With industry economics already soft, it was only a matter of time before insurance pricing would have to adjust. In fact, P&C pricing had already begun to increase in a number of business lines before COVID hit, and that trend has only increased and broadened since then. Chubb disclosed in Q3 2020 that North American commercial P&C pricing increased by more than 15% in aggregate. Some of the price increase will go to cover rising insurance loss rates, but we certainly do anticipate some dropping into underwriting profit too. Admittedly, some of that increased underwriting profit will itself get offset by a decline in investment income owing to lower interest rates, but that is a “feature,” if you will, of P&C insurance companies. Unlike a bank, where the floor on its deposit funding costs practically speaking is zero, there is in theory no reason underwriting profit cannot increase to offset low interest rates, so it is feasible for its earnings to “normalize” far in advance of an eventual rise in long-term rates.
With respect to the setting of loss reserves, we have always admired Chubb’s conservative approach in establishing cautious initial loss estimates and in recognizing the bad news first. In terms of COVID related losses, Chubb Limited (NYSE:CB) reserved $1.4 billion for customers’ claims in the second quarter, the majority of which were “incurred but not reported” loss estimates for professional and general liability lines that would be the second- and third-order impacts of the virus. Like the banks’ “life-of-loan” reserving described above, Chubb has made an honest effort to put all of COVID’s financial impact behind it.
When we started adding to our position in Chubb this year, it was valued at 1.6x tangible book value, and we expect it has the potential to earn a mid-teens return on capital over time and for it to grow decently and gain market share over time.”
7. Laboratory Corporation of America Holdings (NYSE:LH)
Number of Hedge Fund Holders: 60
PE Ratio: 10.83
Laboratory Corporation of America Holdings (NYSE:LH) is an independent clinical laboratory firm. On March 9, the company announced that it had entered into an agreement with Prisma Health to acquire select assets of the outreach laboratory business of the latter. Prisma would also apply the technical expertise of the former in hospital laboratories under the agreement. The transactions are expected to close in the second half of 2022. Laboratory Corporation recently smashed analyst expectations on earnings for the fourth quarter of 2021.
On February 11, investment advisory Citi maintained a Buy rating on Laboratory Corporation of America Holdings (NYSE:LH) stock and raised the price target to $350 from $340. Analyst Patrick Donnelly issued the ratings update.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Melvin Capital Management is a leading shareholder in Laboratory Corporation of America Holdings (NYSE:LH) with 1.9 million shares worth more than $620 million.
At the end of the fourth quarter of 2021, 60 hedge funds in the database of Insider Monkey held stakes worth $2.9 billion in Laboratory Corporation of America Holdings (NYSE:LH), compared to 58 the preceding quarter worth $2.7 billion.
In its Q4 2021 investor letter, Vltava Fund, an asset management firm, highlighted a few stocks and Laboratory Corporation of America Holdings (NYSE:LH) was one of them. Here is what the fund said:
“Three companies that most pleasantly surprised us by their profitability last year (including) LabCorp. LLaboratory Corporation of America Holdings (NYSE:LH) is earning a lot on COVID-19 PCR tests. While 2 years ago this business did not exist at all, today it is driving the company’s huge growth in profitability. Although we expect – and hope – that the number of tests performed will drop significantly soon (and by the way, Laboratory Corporation of America Holdings (NYSE:LH) is able to do 250,000 of them daily), LabCorp’s profitability over the past 2 years has very pleasantly surprised us.”
6. Shell plc (NYSE:SHEL)
Number of Hedge Fund Holders: 41
PE Ratio: 10.68
Shell plc (NYSE:SHEL) is an energy and petrochemical firm. On March 29, the company announced that it was starting production at PowerNap, a subsea tieback development in the Gulf of Mexico. The reserves were discovered in 2014 and highlight a growing trend towards offshore development. The company has also recently signed an MoU to receive LNG at a terminal in Germany amid Western sanctions on Russian gas in the wake of the invasion of Ukraine.
On March 30, JPMorgan analyst Christyan Malek maintained an Overweight rating on Shell plc (NYSE:SHEL) stock and raised the price target to GBP 2,700 from GBP 2,600. Other advisors like Morgan Stanley and Deutsche Bank are also bullish on the stock.
At the end of the fourth quarter of 2021, 41 hedge funds in the database of Insider Monkey held stakes worth $2.6 billion in Shell plc (NYSE:SHEL), up from 33 in the previous quarter worth $2 billion.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Shell plc (NYSE:SHEL) with 18 million shares worth more than $813 million.
In addition to Morgan Stanley (NYSE:MS), Intel Corporation (NASDAQ:INTC), and U.S. Bancorp (NYSE:USB), Shell plc (NYSE:SHEL) is one of the stocks on the radar of hedge funds.
In its Q3 2021 investor letter, Goehring & Rozencwajg Associates, an asset management firm, highlighted a few stocks and Shell plc (NYSE:SHEL) was one of them. Here is what the fund said:
“Royal Dutch Shell’s ESG challenges continue unabated. A Dutch court ruled in May that Shell plc (NYSE:SHEL) must cut its CO2 output by 45% by 2030 to align their policies with the Paris Climate Accord. In a statement issued after the verdict, a Shell plc (NYSE:SHEL) spokesperson acknowledged that “urgent action is needed on climate change and the company is accelerating efforts to reduce emissions.” If the pressure from the Dutch court system was not enough, an activist shareholder has proposed breaking the company apart to address ESG concerns. On October 27th, Third Point Management announced the following.
“If Shell plc (NYSE:SHEL) pursues this type of strategy it would probably lead to an acceleration of carbon dioxide reduction. […] Breaking Shell into two operating units would create a standalone legacy energy business (upstream, refining, and chemicals) that could slow capex beyond what is has already promised, sell assets, and prioritize return of cash to shareholder which can be reallocated into low-carbon areas of the market.”
Shell plc (NYSE:SHEL) has already cut spending dramatically over the last decade. After having peaked at $39 bn in 2013, upstream capital spending fell to only $17 bn in 2020 – a drop of nearly 60%. Spending has barely recovered in the three quarters of 2021. A lack of spending has already impacted production. Proforma for the 2016 acquisition of BG Group, Shell’s total production has fallen 13% since capital spending peaked in 2013. These trends are accelerating: Shell’s production over the first nine months of 2021 have fallen 7% compared with the same period last year.
If Royal Dutch Shell’s upstream capital spending remains at today’s depressed levels, we estimate the company will only be able to replace 30% of production with new reserves and that production will fall 40% over the next nine years. If spending is further curtailed (as is being proposed), Shell’s oil and natural gas production would collapse – something that may have already started.”
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Disclosure. None. 10 Best Undervalued Large-Cap Stocks According to Hedge Funds is originally published on Insider Monkey.