Hedge Funds Love These Undervalued S&P 500 Stocks

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These days, investors willing to take a risk are like kids in a candy store. Stocks are cheap, and if the economy rebounds, they'll be happy campers indeed.

"Nearly 100 of the 460 companies in the Standard & Poor's 500 with profit forecasts for 2011 are selling at single-digit price-earnings ratios based on those earnings expectations," says Matt Krantz ofUSA TODAY.

Stocks with PEs under 10 are generally considered undervalued. For some companies this can be the sign of a rough spot in performance.

Yet some analysts think that for many stocks it is only the general distrust in the economy that leaves company's performances underrepresented in the share price.

Hedge funds are taking note. To help you identify the trends of Big Money, we list below the top 10 S&P 500 stocks with a P/E below 10 and significant levels of institutional buying over the last quarter.

Big Money thinks the following names are undervalued at current levels -- do you agree? Use the list below as a starting point for your own analysis.

List sorted by net institutional buying as a % of share float. (Click here to access free, interactive tools to analyze these ideas)

1. Diamond Offshore Drilling (NYS: DO) : Oil & Gas Drilling & Exploration Industry. Market cap of $8.66B. Current price at $62.3. P/E at 9.04. Net institutional shares purchased in the current quarter at 10.4M, equivalent to 15.09% of the company's 68.90M share float. The stock is a short squeeze candidate, with a short float at 9.13% (equivalent to 5.99 days of average volume). The stock has had a couple of great days, gaining 6.24% over the last week.

2. Advanced Micro Devices (NYS: AMD) : Semiconductor Industry. Market cap of $4.24B. Current price at $6.14. P/E at 5.63. Net institutional shares purchased in the current quarter at 33.2M, equivalent to 5.69% of the company's 583.26M share float. This is a risky stock that is significantly more volatile than the overall market (beta = 2.11). The stock has lost 6.54% over the last year.

3. DeVry (NYS: DV) : Education & Training Services Industry. Market cap of $3.0B. Current price at $43.58. P/E at 9.49. Net institutional shares purchased in the current quarter at 3.3M, equivalent to 5.34% of the company's 61.77M share float. Might be undervalued at current levels, with a PEG ratio at 0.87, and P/FCF ratio at 11.57. It's been a rough couple of days for the stock, losing 15.74% over the last week.

4. Tesoro (NYS: TSO) : Oil & Gas Refining & Marketing Industry. Market cap of $3.0B. Current price at $20.85. P/E at 7.81. Net institutional shares purchased in the current quarter at 6.3M, equivalent to 4.47% of the company's 140.86M share float. The stock has had a couple of great days, gaining 11.74% over the last week. The stock has performed poorly over the last month, losing 12.39%.

5. Discover Financial Services (NYS: DFS) : Credit Services Industry. Market cap of $13.10B. Current price at $24. P/E at 7.92. Net institutional shares purchased in the current quarter at 22.0M, equivalent to 4.07% of the company's 540.58M share float. Might be undervalued at current levels, with a PEG ratio at 0.75, and P/FCF ratio at 3.7. The stock has had a couple of great days, gaining 9.69% over the last week.

6. Cliffs Natural Resources (NYS: CLF) : Steel & Iron Industry. Market cap of $11.0B. Current price at $75.33. P/E at 6.83. Net institutional shares purchased in the current quarter at 5.6M, equivalent to 3.86% of the company's 145.11M share float. This is a risky stock that is significantly more volatile than the overall market (beta = 2.37). The stock has had a couple of great days, gaining 6.22% over the last week. The stock has performed poorly over the last month, losing 25.44%.

7. Humana (NYS: HUM) : Health Care Plans Industry. Market cap of $12.39B. Current price at $74.29. P/E at 9.87. Net institutional shares purchased in the current quarter at 6.3M, equivalent to 3.8% of the company's 165.61M share float. The stock has had a couple of great days, gaining 6.57% over the last week.

8. Forest Laboratories (NYS: FRX) : Drug Manufacturers Industry. Market cap of $9.46B. Current price at $34.45. P/E at 8.38. Net institutional shares purchased in the current quarter at 8.5M, equivalent to 3.45% of the company's 246.52M share float. The stock has performed poorly over the last month, losing 10.33%.

9. Lincoln National (NYS: LNC) : Life Insurance Industry. Market cap of $6.79B. Current price at $22.01. P/E at 6.42. Net institutional shares purchased in the current quarter at 7.4M, equivalent to 2.41% of the company's 307.01M share float. This is a risky stock that is significantly more volatile than the overall market (beta = 2.52). Might be undervalued at current levels, with a PEG ratio at 0.63, and P/FCF ratio at 4.02. The stock has had a couple of great days, gaining 6.48% over the last week.

10. Archer Daniels Midland (NYS: ADM) : Farm Products Industry. Market cap of $18.07B. Current price at $28.33. P/E at 9.11. Net institutional shares purchased in the current quarter at 15.3M, equivalent to 2.4% of the company's 637.39M share float. The stock has had a couple of great days, gaining 8.88% over the last week.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipmna does not own any of the shares mentioned above. Institutional investor data sourced from Fidelity. All other data sourced from Finviz.

At the time this article was published The Motley Fool owns shares of Diamond Offshore Drilling. Motley Fool newsletter services have recommended buying shares of Discover Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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