Over the past couple of weeks, the hedge fund industry has been in turmoil. According to reports from investment banks, including Goldman Sachs (GS, Financial), hedge funds were selling equities at one of the fastest paces on record during the first few weeks of March.
After increasing exposure dramatically in 2021, many hedge funds seem to have been caught off guard by both rising inflation, expectations of interest rate hikes and the war in Ukraine this year.
This has resulted in a significant shift in sentiment, and that is reflected in equity prices. As hedge funds have rotated out of high-flying tech stocks and reduced overall exposure, the valuations of some equities have plunged.
And with that being the case, I have been hunting through hedge fund portfolios to see if any of these firms' top positions have fallen to valuations that look attractive after recent declines.
Charter Communications
A top hedge fund holding that has been on my watchlist for some time is Charter Communications (CHTR, Financial). At the time of writing, this stock is changing hands at around $570 per share, down from around $820 in September of last year.
The telecommunications group has achieved fantastic earnings growth over the past couple of years, with the operating profit growing at a compound annual rate of 35% since 2016. It is also a cash flow champion. Free cash flow per share totaled $45 in 2021, which puts the stock at a price-to-free-cash-flow ratio of 11.5 at the time of writing. The free cash flow yield is nearly 8%.
With Wall Street analysts projecting earnings growth of 15% in 2022 and a further 23% in 2023, the stock does look cheap compared to its current cash flow generation and growth potential.
Meta Platforms
Another top hedge fund stock that currently looks cheap is Meta Platforms (FB, Financial), the company formerly known as Facebook.
There are a number of reasons why investors have been selling this stock recently. Its growth outlook has slipped as it seems as if the market is concerned about the company's decision to pivot away from its traditional advertising business to the Metaverse. It's not like this pivot was natural, either; rather, the company was beginning to see no other way forward given actions taken to reduce Facebook's ability to harvest data without people's consent, and this hurt because selling that data was how Facebook's ad business became so profitable.
Only time will tell if turning to the Metaverse was the right decision, but I believe the corporation has the resources to fund the pivot and move back if it does not work out.
At the end of 2021, Meta's balance sheet had $47 billion of cash and no debt. Free cash flow per share totaled $13.70 in 2021, which puts the stock at a price-to-free-cash-flow ratio of 16 at the time of writing and a free cash flow yield of 6%. For one of the world's premier technology companies, this looks cheap. The stock looks even cheaper if one considers the cash on the balance sheet.
Micron Technology
Semiconductor company Micron Technology (MU, Financial) is another top hedge fund holding, particularly among value-focused hedge funds.
At the time of writing, the stock is trading around $82 per share. That is down from a multi-year high of nearly $100 a share, reached during the first few weeks of 2022.
Even though the semiconductor market is currently experiencing a cyclical upswing, the stock has come under pressure. Underinvestment and the exploding demand are pushing up semiconductor prices.
The company reported a 130% increase in earnings last year, and analysts are expecting further evolution over the next two years.
In fact, after reporting a net profit of nearly $6 billion in 2021, analysts are projecting net income to hit nearly $14 billion in 2023. The stock is trading a forward price-earnings ratio of just 6.7 using 2023 predictions.
As the state of supply shortages in the semiconductor industry is not going to change any time soon, it seems that Micron looks cheap compared to its growth potential, in my view.
