- Buy These 5 Financial Sector Breakout Stocks in October
- 3 Financial Stocks Rising on Unusual Volume
- 3 Big-Volume Stocks to Trade for Breakouts
- 4 Stocks Spiking on Unusual Volume
- How to Trade the Market's Most Active Stocks
5 Stocks Under $10 Hedge Funds Love - views
DELAFIELD, Wis. (Stockpickr) -- It's that time of year again when Wall Street's biggest players report their holdings to the public through 13F filings. Hedge funds and other large asset managers have filed all of their 13F forms with the Securities and Exchange Commission for the second quarter. These filings show which positions some of the smartest money managers are adding to and which stocks they are taking new positions in.
For the purpose of this piece, I want to focus on some low-priced speculative stocks that trade below $10 a share that the biggest players are jumping into here. These low-priced companies could have tremendous upside since some of the smartest guys in the game have deiced to take significant stakes per the latest filings. These names could be attractive at current levels if these managers have found an undervalued situation and their timing is right. Of course, these low-priced stocks also hold a great deal of risk, so investors need to manage risk accordingly.
Managing risk is important no matter what stock you're trading, but it's especially important in under-$10 names since they tend to be more volatile. When managing risk, it's important to use proper position sizing and to cut losses small if the trade goes against you. Remember, you can always get back into a stock at anytime if your first trade doesn't work out, so make sure to trade with the trend and manage that risk.
Stocks that trade below $10 a share are highly speculative in nature. Many mutual funds don't even allow their managers to own stocks that trade below $5 a share since the risk is considered too great. That said, hedge funds can own whatever they want, and if they see value in a low-priced stock they will jump in with zero fear. They might know something the average investor doesn't, or they might have done extensive research that lead them to take a position in an under-$10 name. Whatever the reason, it's never a bad idea to put the under-$10 names the whales are getting into on your watchlist.
With that in mind, here's a look at a number of under-$10 stocks that are being bought by Wall Street's biggest players.
One smart hedge fund legend everyone has heard of is John Paulson, who is the founder and president of Paulson & Co., a New York-based hedge fund. Paulson is famous for becoming a billionaire by short-selling subprime mortgages in 2007 right before the U.S. housing market collapsed. That trade netted him a cool $3.7 billion, and in 2010, he beat a hedge fund record by making almost $5 billion in profits.
Unless you believe that Paulson just got lucky on his subprime bet, then he's probably someone you want to listen to when he makes moves into the housing sector. Back in July, at the Delivering Alpha conference, Paulson said the housing recovery is real, and where he was winning money betting on foreclosures and defaults, he is now making it on a steady run higher in housing prices and sales. Paulson said the housing sector has bottomed and it's not too late to get involved.
Paulson is backing up his bullish housing thesis by loading up on shares of MGIC Investment (MTG), a provider of private mortgage insurance in the U.S. This stock has been on fire so far in 2013, with shares up sharply by 154%.
MGIC Investment has a market cap of $2.29 billion and an enterprise value of 3.17 billion. This stock trades at a reasonable valuation, with a forward price-to-earnings ratio of 25.15. Its estimated growth rate for this year 88.9%, and for next year it's pegged at 157.4%.
MGIC Investment is one of the most levered plays to the housing sector that you can find. This company reimburses lenders when borrowers default and foreclosures fail to recoup costs. In a strong housing market, MGIC Investment will be writing polices left and right as new home owners come into the market. This company thrives on low down payment loans, so there should be plenty of business for them to win if the housing market returns to a more robust environment.
In fact, this company just reported an operating profit of 4 cents per share, vs. Wall Street estimates of a loss of 16 cents per share. That marked the first profit for the company since the second quarter of 2010. Business looks to be turning up for MGIC Investment, which could be one of the reasons why Paulson has been loading up the boat.
Paulson's hedge fund took a new position in MTG after buying 17 million shares worth $84.15 million at an average price of $3.46 a share. Paulson is already up big on this position, so there's no telling how long he plans to keep it. That said, shares of MTG are in a strong uptrend despite its short-term weakness, so it's worth putting on your radar.
From a technical perspective, shares of MTG have recently pulled back from its recent 52-week high at $8.16 a share to right above its 50-day moving average of $6.71 a share. This stock could have more to go on the downside if the market doesn't bounce soon, so I would watch to see if it finds support either at its 50-day, or at $6 to $5.50 a share. Those second levels are the range lows from earlier this summer, so watch to see how it acts here at the 50-day, and then near those second levels if MTG continues lower.
Kodiak Oil & Gas
Another under-$10 name that Paulson is jumping into here is Kodiak Oil & Gas (KOG), an independent energy player engaged in the exploration, exploitation, acquisition and production of crude oil and natural gas in the U.S. This stock hasn't done much so far in 2013, with shares up by just 7.6%.
Kodiak Oil & Gas has a market cap of $2.53 billion. This stock trades at a reasonable valuation, with a trailing price-to-earnings of 25.41 and a forward price-to-earnings of 9.53. Its estimated growth rate for this year 40.4%, and for next year it's pegged at 51.5%.
Paulson's hedge fund added a new position here with KOG after buying 14,958,400 shares between $7.47 a share to $9.07 a share, with an average price of $8.45 a share. This company has been rumored to be a takeover target, so Paulson could be speculating on just that.
Another legendary hedge fund manager that's loading up on some under-$10 stocks here is David Einhorn. Einhorn is the founder and president of Greenlight Capital, a long-short value-oriented hedge fund, which he started in 1996 with $900,000. Greenlight has reportedly produced about a 20% annualized return for investors, which has helped him achieve a net worth of $1.25 billion.
One under-$10 name that Einhorn has initiated a massive new position in is Rite Aid (RAD), which operates a retail drugstore chain in the U.S. This stock has been red hot so far in 2013, with shares up a whopping 150%.
Rite Aid has a market cap of $3.09 billion and an enterprise value of $9.40 billion. This stock trades at a cheap valuation, with a trailing price-to-earnings of 13.99 and a forward price-to-earnings of 13.08. Its estimated growth rate for this year 33.3%, and for next year it's pegged at 62.5%.
Einhorn's play here could be simply betting on Obamacare, since many analysts think the healthcare-retail sector will see a jump in sales once all the new consumers come online under the sweeping act. His position in RAD could also be a turnaround idea or even an acquisition target, since this company recently came out of tough cost cutting environment. Rite Aid is also turning itself wellness player, since its converting stores at a rapid pace into its next generation wellness store format.
During the second quarter, Einhorn bought 20.2 million shares of Rite Aid between $1.71 and $3.15 a share, with an estimated average price of $2.61 a share. Einhorn's position in RAD is worth somewhere near $70 million. Einhorn is already up solidly on this bet, but I would think he's planning on holding it much longer since the stock is uptrending strong.
From a technical perspective, RAD has been uptrending big for the last six months, with shares soaring higher from its low of $1.57 to its recent 52-week high at $3.62 a share. This stock has broken out multiple times during that uptrend and shares are currently not far from its 52-week high. That said, shares of RAD are bit overbought here and are due for a pullback. This one is probably worth a look near its 50-day moving average of $3.01 a share, or near $2.50 a share which its base low from this summer.
Another under-$10 name that Einhorn is getting long here is BioFuel Energy (BIOF), which is engaged in the production and sale of ethanol and its co-products. This stock has been hit hard by the sellers during the last six months, with shares off by 38%.
BioFuel Energy has a market cap of $19.34 million and an enterprise value of $13.37 million. This stock trades at a reasonable valuation, with a price-to-sales of 0.05 and a price-to-book of 0.37. This company has a bit more cash on its books then debt, since its total cash position is $11.23 million and its total debt is $6.7 million.
This company recently reported a second-quarter net loss of $4.74 million vs. a $12.4 million net loss in the year-ago period and revenue of $91 million vs. $122.8 million, which dropped 30% year over year. Clearly not a great fundamental story here, but Einhorn could be playing BIOF as a potential beneficiary of the EPA's Renewable Fuels Standard II, or RFS2, program. Basically, large oil companies could hypothetically go out and buy ethanol plants likes BIOF runs as a way to avoid the RIN regulatory tax.
Einhorn's hedge fund owns 1,427,825 shares of BIOF worth about $4.76 million. The fund increased its stake this quarter, but it's important to understand that this isn't a big position by any means, since it makes up less than 1% of his total stock portfolio.
From a technical perspective, shares of BIOF have been downtrending badly for the last five months, with the stock dropping from over $6 a share to its recent low of $3.01 a share. During that downtrend, shares of BIOF have been consistently making lower highs and lower lows, which is bearish technical price action. That said, BIOF has formed a higher low and its latest pullback with the stock finding buying interest at $3.20 a share.
Investors might want to look to get long BIOF if it can close back above its 50-day moving average of $3.64 with volume. I would like it even more with a close above its 200-day at $4.43 with volume.
One final billionaire hedge fund manger that's making moves in low-priced stocks is Tiger Management's Julian Robertson. Robertson is considered a pioneer in the hedge fund world since a number of money managers who have worked for him have gone on to create some of today's largest hedge funds. He's now retired but invests directly in other hedge funds, most run by former employees that still report 13Fs to the SEC.
Sirius XM Radio
One under-$10 name that Robertson's crew seems to love is Sirius XM Radio (SIRI), which broadcasts its music, sports, news, talk, entertainment, traffic and weather channels in the U.S. for a subscription fee through its proprietary satellite radio systems. This stock has been in play with the bulls so far in 2013, with shares up sharply 24%.
Sirius XM Radio has a market cap of $22.42 billion and an enterprise value of $25.57 billion. This stock trades at a premium valuation, with a trailing price-to-earnings of 48.13 and a forward price-to-earnings of 30.08. Its estimated growth rate for this year -82.4%, and for next year it's pegged at 33.3%.
On Monday, Lazard Capital Market's Barton Crockett said he thinks that SIRI could rise nearly 40% to $5 a share. In a note out to clients, the firm said the Street should have taken the announcement on Monday morning that Sirius and MLB renewed their agreement to extend live broadcasts through 20121 as a more bullish sign. The note also said the deal comes after SIRI said last week that it had signed away Piolin, a major Spanish-language radio personality, from Univision to an exclusive deal.
Robertson added to his holdings in Sirius XM Radio by 76.91%, after he bought the stock between $2.99 and $3.59, with an estimated average price of $3.29. His total holdings of SIRI stock are now 7.3 million shares.
From a technical perspective, shares of SIRI have been uptrending relatively strong for the last year, with shares moving higher from its low of $2.33 to its recent 52-week high of $3.85 a share. During that uptrend, shares of SIRI have been making mostly higher lows and higher highs, which is bullish technical price action. That said, shares of SIRI have started to come off its 52-week high with conviction and the stock looks ready to break below its 50-day moving average of $3.57 a share.
If that level gets broken with volume, then SIRI could easily set up to re-test its 200-day at $3.21 a share, or trend much lower. If both its 50-day and 200-day moving averages are taken out on this pullback, then I would put SIRI on my watchlist for a potential buy once it trades below $3 or near its two-year base level at $2.50 a share.
To see more under-$10 names the Wall Street whales are moving into, check out the Under-$10 Stocks Hedge Funds Love portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.