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TheStreet Open House

5 Stocks Under $10 Hedge Funds Love

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.

>>5 Dividend Stocks That Want to Pay You More

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.

MGIC Investment

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%.

>>5 Rocket Stocks to Buy Now

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.

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