Some pretty hard-hit value names were quite popular among the smart money in the second quarter. And while the tech trade continues to be in the driver’s seat, I find it quite interesting that many of the hedge fund favorites for Q2 were the fallen, lower-multiple names that have not only sat out the great market rally but have sunk despite the strength in just about everything else.
Indeed, such value bets suggest there’s still plenty of value plays to be had as the S&P looks to make higher highs as it blasts past the 6,400 level. For stock pickers who have an appetite for value ahead of September, the following pair of recent hedge fund bets is definitely worth a second look, even if there’s not much going for them so far this year.
So, is there any sense in stepping in as a contrarian on the following underperforming value names? I do think so, especially given they’ve been overpunished, with fundamentals that are still worth getting behind.
UnitedHealth Group
It’s hard to believe that a major Dow component would be down more than 50% year to date. Indeed, UnitedHealth Group (NYSE:UNH | UNH Price Prediction) stock has seen its medical cost ratio rise (lower is better) quite sharply as of the second quarter. And while the broader health insurance sector has been under considerable pressure in the past year, UNH stock seems to have taken center stage.
With lower guidance and a wave of analyst downgrades weighing down the shares, questions linger as to whether or not the former top Dow stock will have what it takes to make it through profound industry pressures. Add recent downgrade from Baird into the equation (they have an underweight rating alongside a mere $198 per-share price target, which entails around 20% downside from current levels), over industry headwinds and “challenged” fundamentals, and it seems like it’s time to bail before the falling knife has a chance to sink further.
In any case, one thing is certain: the stock is cheap at 10.8 times trailing price-to-earnings (P/E) after getting a near-60% haircut from its prior highs, and the dividend yield (3.61%) is quite swollen. Perhaps it’s the low price of admission that has many hedge funds more than doubling their position in the name during the second quarter.
Adobe
Adobe (NASDAQ:ADBE) is another beaten-down value stock that the smart money bought on the dip in Q2. The stock is down 23% year to date and 51% from its 2021 all-time highs, thanks in part to fears of AI disruption. Of course, Adobe has its own AI innovations that have made the Creative Suite much sweeter in recent years. Despite the nice-to-have new AI features, though, the tech hasn’t really helped boost sales growth or margins. Furthermore, Adobe must continue to invest heavily in AI efforts to stay ahead of the new competition in the space.
While the AI threat is there, I think investors are overblowing the whole situation. If Adobe gets AI right, there’s a lot of growth to be had as the TAM (total addressable market) swells as AI turns just about everybody into an artist or designer. After all, cheaper, easier-to-use tools could be a real boon for usage.
In many ways, I find the Adobe story to be quite similar to that of Alphabet (NASDAQ:GOOG). It’s an AI-capable firm that must defend itself from AI-equipped rivals battling to even the playing field and grab a slice of the incumbent’s slice of the market. As Adobe moves ahead with its agentic AI roadmap while flooring it with Firefly, there’s a lot to love about the narrative going into the new year. Perhaps it should be no mystery as to why ADBE stock was scooped up by quite a few hedge funds in Q2.
Compared to design rival Figma (NYSE:FIG), which recently debuted on public markets, ADBE looks like a relative bargain at 14.5 times forward P/E. And while competition is coming in from all sides, I’m pretty confident CEO Shantanu Narayen will succeed as he fights AI with AI.
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