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16 Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds

In this article, we will take a look at the 16 most undervalued small-cap stocks to buy according to hedge funds. To see more such companies, go directly to 5 Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds.

Despite strong signs that the central bank would be ready to hit brakes on its rate-hike spree, financial markets remain in a wait-and-see mode amid a weakening consumer sentiment and visible cracks in the labor market. Investors are concerned that the central bank might not be able to achieve its 2% inflation goal after all. They are also concerned that the recession everyone was talking about might materialize in 2024 since the real effects of the rate hikes are just getting started to be visible. Because of these concerns, any market rally is immediately followed by declines. This is also true for small-cap stocks, which kept struggling to enjoy a sustained rally this year. The Russell 2000 Index, one of the most popular small-cap indices, jumped about 5% after a softer-than-expected inflation report in November boosted investors’ hopes that a new bull run would start in the market, helping growth stocks and small-cap companies. But overall, the index was on its way to close its worst year since 1998 when compared to large-cap stocks. A Bloomberg report took a look at the movements of the index and found out that there have been several instances when the small-cap index began to see a rally this year, only to retreat further amid fears driven by several market factors. One of the biggest factors dragging small-cap companies is higher borrowing costs.

“You can rent the small-cap rally, but don’t own them yet. The biggest issue is the upcoming refinancing cycle, as a quarter of firms have been loss-making in the last three years despite super-strong nominal GDP growth,” the Bloomberg report quoted Manish Kabra, head of US equity strategy at Societe Generale SA.

Despite this, the Russell 2000 Index is up about 6.2% in 2023. High interest rate environment won’t be here forever, and that’s why long-term investors call it a golden chance to buy the dip on small-cap companies that have strong business models and long-term growth catalysts.

 Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds
Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds

Photo by Mohamed Hadji on Unsplash

Methodology

For this article we scanned Insider Monkey's database of 910 hedge funds and picked 16 small-cap stocks with PE ratios under 15 and the highest number of hedge fund investors. This way, these are the most undervalued small-cap stocks to buy according to elite hedge funds.

Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds

16. Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY)

Number of Hedge Fund Holders: 24

Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) ranks 16th in our list of the most undervalued small-cap stocks to buy according to hedge funds. Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) recently posted third quarter results. Adjusted EPS in the period came in at $0.97, beating estimates by $0.16. Revenue in the quarter jumped about 36.8% year over year to $160.3 million, beating estimates by $11.69 million.

As of the end of the third quarter of 2023, 24 hedge funds out of the 910 funds tracked by Insider Monkey had stakes in Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY). The biggest stakeholder of Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) was Albert Cha and Frank Kung’s Vivo Capital which owns an $85 million stake in the company.

15. Liberty Latin America Ltd. (NASDAQ:LILAK)

Number of Hedge Fund Holders: 25

Telecom services company Liberty Latin America Ltd. (NASDAQ:LILAK) last month posted third quarter results. Revenue in the period came in at $1.13 billion, meeting estimates. Liberty Latin America Ltd. (NASDAQ:LILAK) added 44,000 organic internet and postpaid mobile subscribers.

Out of the 910 hedge funds tracked by Insider Monkey, 25 hedge funds had stakes in Liberty Latin America Ltd. (NASDAQ:LILAK) as of the end of the September quarter.

14. Enova International Inc. (NYSE:ENVA)

Number of Hedge Fund Holders: 25

As of the end of the September quarter, 25 hedge funds had stakes in Enova International, Inc. (NYSE:ENVA), as per Insider Monkey’s database of 910 hedge funds. The biggest stakeholder of Enova International, Inc. (NYSE:ENVA) was Ari Zweiman’s 683 Capital Partners which owns a $61 million stake in the company.

In its Q3 earnings call Enova International, Inc. (NYSE:ENVA) talked about Q4 estimates:

“We expect revenue to grow between 5% and 7%, as we continue to focus on an origination strategy that balances growth and risk against the current macro environment.

This should lead to continued stable credit, resulting in a total company net revenue margin between 55% and 58%. In addition, we expect marketing expenses as a percentage of revenue to be in the low 20%, O&T costs of around 9% of revenue and G&A costs of around 7% of revenue. These expectations should lead to sequential adjusted EPS growth of 10% to 20% in the fourth quarter. Our fourth quarter expectations will depend upon customer payment rates and the level timing and mix of originations growth. Our third quarter results continued to demonstrate the ability of our team to deliver record levels of growth in revenue while maintaining solid credit and profit margins. Our strong financial position, diversified product offerings, flexible balance sheet, competitive position and new opportunity to return meaningful capital to our shareholders and is well positioned to deliver on our commitment to driving long-term shareholder value.”

Read the full earnings call transcript here.

13. EchoStar Corporation (NASDAQ:SATS)

Number of Hedge Fund Holders: 25

Satellite communication company EchoStar Corporation (NASDAQ:SATS) ranks 13th in our list of the most undervalued small-cap stocks to buy according to hedge funds.

Of the 910 hedge funds in Insider Monkey’s database, 25 hedge funds were long EchoStar Corporation (NASDAQ:SATS) as of the end of the September quarter. The biggest stakeholder of EchoStar Corporation (NASDAQ:SATS) was David Alexander Witkin’s Beryl Capital Management which owns a $36 million stake in the company.

12. Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY)

Number of Hedge Fund Holders: 26

Restaurant and entertainment business company Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) ranks 12th in our list of the best most undervalued small-cap stocks to buy now.

As of the end of the September quarter, 26 hedge funds in Insider Monkey’s database of 910 hedge funds had stakes in Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY). The biggest stakeholder of Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) was Scott Ross’s Hill Path Capital which had a $264 million stake in the company.

11. MasterBrand, Inc. (NYSE:MBC)

Number of Hedge Fund Holders: 26

Kitchen and bathroom cabinets products company MasterBrand, Inc. (NYSE:MBC) ranks 11th in our list of the most undervalued small-cap stocks to buy according to hedge funds. Last month MasterBrand, Inc. (NYSE:MBC) posted third quarter results. Adjusted EPS in the quarter came in at $0.46, beating estimates by $0.12. Revenue in the quarter totaled $677.3 million, missing estimates by $9.7 million.

Insider Monkey’s database of 910 hedge funds shows that 26 hedge funds had stakes in MasterBrand, Inc. (NYSE:MBC).

Oakmark Funds made the following comment about MasterBrand, Inc. (NYSE:MBC) in its Q4 2022 investor letter:

“In addition to these new investments, we received shares in MasterBrand, Inc. (NYSE:MBC) upon its spin-off in December from Fortune Brands Home & Security. Following the spin-off, Fortune Brands was renamed Fortune Brands Innovation (FBIN), and MasterBrand became a separate publicly traded company. MasterBrand is a leading cabinet manufacturer that maintains the largest scale, the most diverse channel mix, and the broadest product portfolio in the industry. We believe that both Fortune Brands Innovation and MasterBrand are undervalued stocks, and we remain investors in each of them.”

10. DHT Holdings, Inc. (NYSE:DHT)

Number of Hedge Fund Holders: 26

Crude oil tankers company DHT Holdings, Inc. (NYSE:DHT) is a high dividend yield small-cap stock in our list of the best undervalued small-cap stocks to buy according to hedge funds. DHT Holdings, Inc. (NYSE:DHT) has a dividend yield of over 8%.

As of the end of the third quarter of 2023, 26 hedge funds had stakes in DHT Holdings, Inc. (NYSE:DHT). The biggest stakeholder of DHT Holdings, Inc. (NYSE:DHT) was Jeremy Hosking’s Hosking Partners which owns a $44 million stake in the company.

Evermore Global Value Fund made the following comment about DHT Holdings, Inc. (NYSE:DHT) in its first quarter 2023 investor letter:

“The Fund ended the quarter with two new positions – DHT Holdings, Inc. (NYSE:DHT) and Stainless Tankers ASA (STST NO; Norway). Below please find a summary of our investment in DHT Holdings.

Starting this past January, we initiated our investment in DHT Holdings, Inc. (DHT US), a $1.7 billion market cap, crude tanker operator primarily focused on the larger sized tanker vessels called Very Large Crude Carriers (“VLCC”). Founded in 2005, DHT is one of the leading global crude tanker operators with a fleet of 23 VLCCs which has a total carrying capacity of 7.2 million DWT.

We have been closely monitoring DHT since the Fund’s first in-depth foray into the shipping sector in late 2015 / early 2016. Over the years, we have observed DHT’s various milestones including Frontline’s all-share offer for DHT in 2016 (the Fund previously owned Frontline). DHT ultimately rejected Frontline’s offer and instead DHT acquired 11 VLCCs from BW Group in 2017. As part of the transaction, BW Group became a significant holder with a 33.5% stake at that time and BW Group continues to own almost 16% of DHT today. BW Group is the family-controlled holding company for the Sohmen-Pao family, who is well-regarded operator and savvy investor in the maritime industry. It should be noted that the BW Group is also an anchor shareholder in another Fund investment, Cadeler, the offshore wind installation vessel operator…” (Click here to read the full text)

9. Everi Holdings Inc. (NYSE:EVRI)

Number of Hedge Fund Holders: 26

Las Vegas-based Everi Holdings Inc. (NYSE:EVRI) provides slot machines and other services to casinos. Everi Holdings Inc. (NYSE:EVRI)’s shares have lost about 31% over the past one year.

Out of the 910 hedge funds tracked by Insider Monkey, 26 hedge funds were long Everi Holdings Inc. (NYSE:EVRI). The most significant stakeholder of Everi Holdings Inc. (NYSE:EVRI) during this period was Jeffrey Jacobowitz’s Simcoe Capital Management which had a $52 million stake in the company.

Everi Holdings Inc. (NYSE:EVRI) talked in detail about its expectations in 2024 during Q3 earnings call:

“Our estimated full-year expense for our vault cash is expected to be approximately 21 million compared to only nine million in 2022. We remain comfortable with our current level of debt and our cash interest costs. We ended the third quarter with total net leverage at 2.5 times trailing adjusted EBITDA, which remains in line with our 2.5 times to three times target free cash flow generated a quarter was 34.3 million compared with 44.9 million a year ago. The decline was the result of 5 million of increased net cash interest costs and 5 million of higher capital expenditures related primarily to the discrete capital items we discussed for 2023, including the new assembly facility in Las Vegas and other IT infrastructure investments. We will continue to focus our capital allocation strategy on reinvesting in our business for growth.

This includes maintaining R&D spending on a consolidated basis in a range of 8% to 8.5% of revenues. And as we transition to our next family of gaming cabinets, making increased capital investments in our installed base to drive future revenue growth, while we are still working to finalize our views for 2024 overall, we currently do not expect any material increase in the total capital expenditures from the 2023 levels.”

Read the full earnings call transcript here.

8. BrightSphere Investment Group Inc. (NYSE:BSIG)

Number of Hedge Fund Holders: 26

Ranking 8th in our list of the most undervalued small-cap stocks to buy according to smart money investors is BrightSphere Investment Group Inc. (NYSE:BSIG), which has lost about 12% in value over the past 12 months. Last month BrightSphere Investment Group Inc. (NYSE:BSIG) announced its third quarter results. GAAP EPS in the quarter came in at $0.46. Revenue increased by about 23.6% year over year to $107.3 million.

Of the 910 hedge funds tracked by Insider Monkey, 26 funds had stakes in BrightSphere Investment Group Inc. (NYSE:BSIG). The biggest stakeholder of BrightSphere Investment Group Inc. (NYSE:BSIG) was John Paulson’s Paulson & Co which owns a $174 million stake in the company.

Third Avenue Management made the following comment about BrightSphere Investment Group Inc. (NYSE:BSIG) in its Q4 2022 investor letter:

“BrightSphere Investment Group Inc. (NYSE:BSIG), and Cal Maine Foods were eliminated. BrightSphere and Cal Maine were both prototypical time-arbitrage/special situation investments. At the time of original purchase, asset manager, BrightSphere was undergoing a transformation leading to a series of asset sales in 2021. A large portion of the proceeds were returned via a tender offer in December 2021. After shares rose roughly 25% in the fourth quarter, the remaining position was monetized to redeploy into other more attractive securities. Egg producer, Cal Maine, was purchased during the depths of Covid at a deeply discounted valuation. As inflation grips the economy, Cal Maine has benefitted from consumers flocking to cheap sources of protein. In addition, an outbreak of bird flu in the US has disrupted supply. Fortunately, Cal Maine’s flock was spared from bird flu and the company was able to benefit from higher prices without experiencing supply disruptions. Cal Maine’s share price rose 70% in 2022 reaching a valuation meaningfully above our estimate of net asset value. Like BrightSphere, the position was eliminated to raise capital for better opportunities. Selling is not a decision Fund Management takes lightly. The time-arbitrage/ special situation bucket is comprised of companies where the thesis is dependent on an event of change in cycle dynamics. In both cases, the thesis played out as expected and given the valuation improvement, the securities were no longer a good fit for the portfolio.”

7. Herbalife Ltd. (NYSE:HLF)

Number of Hedge Fund Holders: 28

Dietary supplements company Herbalife Ltd. (NYSE:HLF) ranks 7th in our list of the most undervalued small-cap stocks to buy according to hedge funds. During the third quarter, Herbalife Ltd. (NYSE:HLF)’s adjusted EPS in the quarter came in at $0.65, missing estimates by $0.08. Revenue came in at $1.28 billion, beating estimates by $30 million.

Herbalife Ltd. (NYSE:HLF) talked about its state of business, China and other important matters during Q3 earnings call:

“The US market continues to be a primary focus for us. The regional team is highly engaged in taking numerous actions to launch new initiatives to drive recruitment, stimulate engagement, improve productivity and support the return to growth. We are beginning to see positive signs in some of our key states as a result of these initiatives. We have also have distributor working groups in place to accelerate the sharing of best practices. While our turnaround efforts are beginning to gain traction, it will take time to see meaningful results. In China, reported net sales improved for the second consecutive quarter this year. Year-over-year reported net sales were down 19%, which is primarily due to tough comps versus the prior year due to the 5% price increase implemented in August of 2022.

Net sales in local currency were down 14%. China is another key market we are laser focused on. Since joining us in August, Stephan has been working very closely with the regional team and distributors to develop a strategy to identify key growth opportunities to get that market back on track. Turning to our capital structure and cash position. During the quarter and inline with our objective to reduce our nominal debt levels, we repurchased approximately $66 million of our 2024 convertible notes at a discount."

Read the full earnings call transcript here.

6. Target Hospitality Corp. (NASDAQ:TH)

Number of Hedge Fund Holders: 28

Rental and hospitality services company Target Hospitality Corp. (NASDAQ:TH) shares have lost about 30% in value over the past one year. Last month Target Hospitality Corp. (NASDAQ:TH) posted strong third quarter results. GAAP EPS in the quarter came in at $0.43, in-line with estimates. Revenue in the quarter fell about 8.6% year over year to $145.9 million, beating estimates by $5.13 million.

As of the end of the third quarter of 2023, 28 hedge funds in Insider Monkey’s database had stakes in Target Hospitality Corp. (NASDAQ:TH).

Click to continue reading and see 5 Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds.

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Disclosure: None. 16 Most Undervalued Small-Cap Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.

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