The list of stocks hedge funds are buying is always lengthy but according to Morgan Stanley, hedge funds have been allocating capital to a select group of beaten down stocks on expectations that they will likely rebound in the coming months. Hedge funds are taking advantage of the 3% and 4% decline in European and U.S bank stocks. Morgan Stanley said that hedge funds began adding to their positions in bank and insurance stocks in August, reaching a 12-month high by September 21 of this year.
Also on the list of stocks hedge funds are buying are industrial and energy companies, mainly oil producers. Energy stocks have gotten more attractive with crude oil spiking above $85 a barrel after war broke out in Israel. This price increase is likely to boost future profits of oil producers. Here are three stocks hedge funds are buying in Q4 of this year.
Bank of America (BAC)
One of the most beaten down bank stocks is Bank of America (NYSE:BAC), the second largest lender in the U.S. On October 3, BAC stock hit a 52-week low of $25.46 per share. The low price is no doubt attractive to hedge funds, which is why Bank of America has ended up on lists of the most widely bought stocks. But the current valuation is also sure to be attractive. Right now, Bank of America’s shares are trading at only seven times future earnings, which is extremely low.
Additionally, BAC stock pays a quarterly dividend of 24 cents a share, giving it a high yield of 3.56%. Add it all up and Bank of America looks like an extremely undervalued blue-chip stock that is likely to rise sharply once investors pivot back to bank stocks. Indeed, Bank of America’s share price rose nearly 3% on October 10 as bond yields fell from their recent highs. Also, much of the weakness in BAC stock this year has been due to broad-based sector weakness. The lender has continued to issue strong financial prints each quarter.
General Motors (GM)
General Motors (NYSE:GM) is having a tough time right now. The Detroit automaker is grappling with strikes by its unionized workers in both the U.S. and Canada. More than 4,o00 workers at GM’s Canadian operations began job actions, shutting down important manufacturing plants that include its main powertrain facility and its North American parts distribution center. Fortunately, the strike in Canada ended hours after it began with GM reaching a tentative agreement with its workers north of the border.
However, there is no end in sight for the targeted strikes being carried out by the United Auto Workers (UAW) in the U.S. Management at GM continues to balk at demands for 40% pay raises in the U.S. and a return to traditional pensions. It’s unknown how long the U.S. strike will last, but it’s taking a toll on GM stock, which is down 7% on the year. The company’s share price recently hit a three year low and has declined 54% from a 2022 peak. Looking out further, GM stock has made no gains over the last 12 years, even when factoring in dividends.
While depressing, the decline has attracted hedge funds, who have been buying up this industrial stock. Hedge fund managers are no doubt betting on a new collective agreement being reached with the UAW in the U.S., which should spark a relief rally in GM stock.
Chevron (CVX)
U.S. oil giant Chevron (NYSE:CVX) is another stock that hedge funds have been aggressively buying since crude oil prices began to march higher in August of this year. Brent crude oil, the international standard, rose 16% between August 2 and September 27 when it peaked right around $95 per barrel. The price increase should lead to oil producers such as Chevron reporting higher profits for this year’s third quarter. While crude prices fell to start October, they quickly rebounded following war breaking out in Israel. Brent crude oil is now above $87 a barrel.
While Chevron may not return to the record profits it reported in 2022 when the price of crude oil peaked above $120 per barrel, the strength of prices in recent months should help the company and its stock recover from a decline this year. Since January, CVX stock has fallen over 7%. The company’s shares are now trading at an attractive valuation of 10 times future earnings. Throw in a quarterly dividend that pays $1.51 a share and yields 3.74% and a $75 billion stock buyback program, and it’s easy to see why hedge funds have been loading up on CVX stock.
On the date of publication, Joel Baglole held a long position in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
