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Five Beaten-Down Stocks Billionaire Hedge Funds Are Buying

NEW YORK (TheStreet) -- Our specialty is identifying deep value stocks that have a catalyst at work.

One of our favorite "deep value screens" identifies cheap stocks in which rich, influential investors have taken a significant stake. This tends to be a very powerful formula.

Read More: 7 Stocks Warren Buffett Is Selling in 2014

As a shareholder, the presence of this type of investor can mean you have a partner on your side, working everyday to push management to unlock value in the company. These investors tend to be very good at creating change in the companies they own. And the biggest predictor in the repricing of a deeply undervalued stock is change.

Below are five stocks that have been beaten down this year. And some of the biggest names in the hedge fund industry are aggressively buying them.

1) The Babcock & Wilcox Company (BWC) . This stock is down 14% in 2014. It's owned by three different large hedge funds, two of which are activists: Blue Harbour Group and Starboard Value. The third fund is Glenview Capital Management, which is run by the billionaire stock picker Larry Robbins.

2) SandRidge Energy (SD) . Billionaire hedge fund manager Leon Cooperman of Omega Advisors owns almost 10% of SandRidge and has been adding to his position all year. SandRidge has been rumored to be a takeover candidate but is still down 15% year to date.

3) Groupon (GRPN) The multibillion dollar activist hedge fund Jana Partners owns more than 7% of Groupon and added to its position last quarter. Groupon is down 48% this year and 70% from its IPO price in 2012.

4) Compuware Corporation (CPWR) . This stock is owned by two top billionaire hedge fund managers who combined have a 16% stake: John Paulson and Paul Singer of Elliot Management. Compuware is another stock that has been rumored to be a takeover candidate. It's down 16% year to date.

5) Titan International (TWI) . This stock is owned by the genius activist investor Dr. Mark Rachesky of MHR Fund Management. Rachesky holds both a medical degree and an MBA from Stanford University and was Carl Icahn's star protege. Rachesky owns 13% of Titan and recently doubled his position. Titan is down 18% year to date.

Read More: We're Just Not That Into Our 401(k)s

To piggyback our actively managed portfolio of deep value stocks that are owned by the world's best hedge funds, follow us at www.billionairesportfolio.com.


Now let's look at TheStreet Ratings' take on some of these stocks.

TheStreet Ratings team rates BABCOCK & WILCOX CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate BABCOCK & WILCOX CO (BWC) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, notable return on equity and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • BWC's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.01, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Electrical Equipment industry and the overall market, BABCOCK & WILCOX CO's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • BWC, with its decline in revenue, underperformed when compared the industry average of 6.5%. Since the same quarter one year prior, revenues fell by 22.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • BABCOCK & WILCOX CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, BABCOCK & WILCOX CO increased its bottom line by earning $3.08 versus $1.91 in the prior year. For the next year, the market is expecting a contraction of 43.2% in earnings ($1.75 versus $3.08).

TheStreet Ratings team rates SANDRIDGE ENERGY INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate SANDRIDGE ENERGY INC (SD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, weak operating cash flow and generally higher debt management risk."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for SANDRIDGE ENERGY INC is currently very high, coming in at 74.91%. It has increased significantly from the same period last year. Regardless of the strong results of the gross profit margin, the net profit margin of -6.52% is in-line with the industry average.
  • SD, with its decline in revenue, underperformed when compared the industry average of 2.6%. Since the same quarter one year prior, revenues fell by 26.9%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, SANDRIDGE ENERGY INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $140.34 million or 46.68% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Oil, Gas & Consumable Fuels industry average. The net income has decreased by 19.6% when compared to the same quarter one year ago, dropping from -$20.44 million to -$24.44 million.

At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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