3 Inexpensive Stocks That Hedge Funds Are Buying

 |  Includes: BG, SEB, VLO
by: Hedgephone

If you thought hog farming, commodity trading, and global shipping were pretty unrelated businesses to be in, think again. Seaboard (NYSEMKT:SEB) has vertically integrated its business and has created around 2 Billion of shareholder equity in the process. At a market cap of just 7% or so above book value, Seaboard looks undervalued when factoring in the company's 6.4X PE ratio and stellar long-term growth rate.

In fact, Seaboard has managed to more than double its cash flows from operating activities over the past three years. Many analysts have questioned this growth rate, but the fact remains that the company is one of the best managed conglomerate businesses in the world. With any commodity business, however, one must view the cyclical nature of the industry with a good deal of skepticism and certainly shipping is thought to be cheap for a good reason right now.

Investors in Genco Shipping GNK and Excel Maritime EXM know exactly what I am talking about. Unlike the dry bulk shippers, Seaboard has a more diversified business model which can even out the volatility during the hard times. Renaissance Technologies and Kahn Brothers & Company are two of the larger names invested here, but I expect the hedge fund community to take notice if earnings and cash flow remain on a positive trajectory.

Another below book stock that I am watching is Valero (NYSE:VLO). Hedge funds like Aronson Johnson Ortiz, LSV Asset Management, and Blackrock are owners of the stock and for good reason: Valero trades for just 81% of book value and just 5.3X forward earnings. The all important crack spread will continue to be in focus, but Valero seems to have pulled together a robust turnaround from the worst days of the 2008 meltdown.

While quarterly revenue growth of 57% may not be maintained going forward, the business generated a solid 13.5% return on equity over the past year and if Valero can keep that kind of income stream rolling in I would expect the hedge fund and investment community to take notice and re-price VLO somewhere closer to book.

Shares of Bunge (NYSE:BG) have not moved too much over the past year or two, but they have certainly beaten inflation and many equity alternatives since we started covering the company in 2010. We think Bunge is cheap at 88% of book value and at 8.87X earnings. Even though the company operates in a razor thin margin business, the company has managed to eke out solid returns on capital for its shareholders.

If Bunge can deliver a 10% return on equity over the next few years, investors will have a nice margin of safety here. Bunge options look to us to be the best way to play the name, either using Bull put spreads (selling a $65 put and buying a $50 put for example) or simply selling put options here to lower your cost basis versus buying the shares outright. At Hedgephone.com, we don't like being greedy. Global Thematic Partners, LLC holds a $330MM position in the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.