Value Ideas: Hedge Funds Love These 10 Undervalued S&P 500 Stocks

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S&P 500 profits are back to pre-crisis levels, but valuations are still low. Does this signal a buying opportunity?

Large American companies are beginning to look healthy again, although this has not been reflected in their stocks’ share prices. The S&P 500 companies are set to increase net income by 19% (13% up in the second quarter), according to Rita Nazareth and Lu Wang of  Bloomberg. This is in step with the 6.9% average net income increases that S&P 500 companies have posted over the past 51 years.

Despite these profit improvements, S&P 500 shares appear undervalued by their price-earnings (P/E) ratios, indicating that investors have yet to snap up these well-performing stocks.

The overall S&P 500 index is trading at a P/E of 13.5 (based on projected earnings), which is almost 8% lower than the ratio's 5-year average.

Investors may still be hesitant about investing in stocks given the wobbly global economy. The Euro crisis has yet to be resolved, the debt ceiling is still a pressing issue in the US, China is making a concerted effort to slow down its rapidly expanding economy, employment data has been weak in the US, and the Federal Reserve has ended its bond-buying stimulus program (QE2).

“The fact that valuations have not returned to normal is simply that people are prejudiced against stocks… Earnings growth has been spectacular. People who are buying stocks today are buying an undervalued asset,” David Kelly, of JPMorgan told  Bloomberg.

By contrast, Brian Jacobsen of Wells Fargo sees things in a slightly different light.

“Valuations are still at a discount because investors don’t just pay for the next quarter’s earnings…They pay for the whole trajectory of earnings going into the future. Though you can be optimistic about what will be reported for the quarter that just ended, it’s hard to get too excited about growth going forward,” Jacobsen told  Bloomberg.

To help you with your own research, we compiled a list of S&P 500 companies undervalued by their P/E-Growth (PEG) ratios (PEG less than 1) that institutional investors have been buying up during the current quarter.

Hedge funds love these undervalued stocks--do you agree? Use this list as a starting point for your own research.

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List sorted by net shares bought by institutional investors as a percentage of the share float.

1. BlackRock, Inc. (BLK): Asset Management industry with a market cap of $35.84B. It has a PEG ratio of 0.89. In the current quarter, institutional investors have bought 31.3M shares (net), which represents 26.53% of the 117.97M share float.

2. First Solar, Inc. (FSLR): Semiconductor - Specialized industry with a market cap of $10.94B. It has a PEG ratio of 0.92. In the current quarter, institutional investors have bought 3.0M shares (net), which represents 5.11% of the 58.70M share float.

3. Hewlett-Packard Company (HPQ): Diversified Computer Systems industry with a market cap of $73.2B. It has a PEG ratio of 0.99. In the current quarter, institutional investors have bought 100.8M shares (net), which represents 4.87% of the 2.07B share float.

4. Citigroup, Inc. (C): Money Center Banks industry with a market cap of $116.21B. It has a PEG ratio of 0.87. In the current quarter, institutional investors have bought 139.2M shares (net), which represents 4.78% of the 2.91B share float.

5. Wells Fargo & Company (WFC): Money Center Banks industry with a market cap of $145.93B. It has a PEG ratio of 0.97. In the current quarter, institutional investors have bought 235.6M shares (net), which represents 4.77% of the 4.94B share float.

6. Microsoft Corporation (MSFT): Application Software industry with a market cap of $224.56B. It has a PEG ratio of 1.0. In the current quarter, institutional investors have bought 305.4M shares (net), which represents 4.09% of the 7.46B share float.

7. Staples, Inc. (SPLS): Specialty Retail, Other industry with a market cap of $10.89B. It has a PEG ratio of 0.84. In the current quarter, institutional investors have bought 21.9M shares (net), which represents 3.09% of the 707.97M share float.

8. Nasdaq OMX Group Inc. (NDAQ): Diversified Investments industry with a market cap of $4.26B. It has a PEG ratio of 0.79. In the current quarter, institutional investors have bought 3.1M shares (net), which represents 2.43% of the 127.48M share float.

9. Hartford Financial Services Group Inc. (HIG): Property & Casualty Insurance industry with a market cap of $11.18B. It has a PEG ratio of 0.88. In the current quarter, institutional investors have bought 8.3M shares (net), which represents 2.07% of the 401.04M share float.

10. Harman International Industries Inc. (HAR): Electronic Equipment industry with a market cap of $3.24B. It has a PEG ratio of 0.82. In the current quarter, institutional investors have bought 1.4M shares (net), which represents 2.01% of the 69.68M share float.

(List compiled by Andrew Dominguez)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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