3 Cheap Contrarian Stocks That Top Fund Managers Bought in Q2

Last week, multiple fund managers released their 13F filings for the second quarter, revealing their latest stock buys and sells. Like every quarter, there were some surprise contrarian bets that funds made during Q2. In this article, we’ll discuss three underperforming stocks that perhaps got too cheap for fund managers to ignore.

To start, we’ll look at Berkshire Hathaway’s (BRK.B) 13F. The company is run by the legendary Warren Buffett, who has been a net seller (i.e., more sells than buys) of stocks for 7 straight quarters. The stock sales, which have included trimming stakes in top holding Apple (AAPL) coupled with Berkshire’s organic cash flows, have helped lift the company’s cash pile to a record high of $277 billion.

Berkshire Hathaway Bought Ulta Beauty Shares in Q2

Berkshire Hathaway added a new position in Ulta Beauty (ULTA) during Q2. I would be careful not to say that Buffett himself added the stock, as the stake was only worth around $266 million at the end of June - implying that one of the conglomerate's other asset managers bought the stock. While Ulta Beauty shares soared after the revelation of Berkshire buying a stake in the company, the stock is still down 22% for the year.

Ulta Beauty has warned of slowing demand, and its same-store growth sagged in the most recent quarter. However, its valuations were also quite depressed, which made it a value stock. 

Despite last week’s recovery, ULTA trades at a next 12-month (NTM) price-to-sales multiple of 1.54x, while the NTM price-to-earnings (PE) multiple is 14.4x. Both multiples are significantly below their long-term averages; however, this should be seen in context. Ulta Beauty's revenues are expected to rise by 3.0% and 5.9% in the current and next fiscal year respectively – which is much lower than what the company has delivered over the previous couple of years.

Bill Ackman Loaded Up Nike Stock

Bill Ackman’s Pershing Square revealed a nearly $230 million investment in Nike (NKE) made during Q2. The billionaire fund manager rose to prominence with his $27 million bet on credit default swaps in March 2020. It went down as one of the most iconic trades of all time, as that tiny bet soared to a whopping $2.6 billion within a month.

Just like Ulta Beauty, Nike stock has also underperformed in 2024. It hit an all-time closing high of over $173 in November 2021, but subsequently closed in the red for both 2022 and 2023. With a YTD loss of over 23%, it is the third worst-performing Dow Jones Industrial Average ($DOWI) constituent, trailing only Boeing (BA) and top loser Intel (INTC).

Nike is battling a severe slowdown, and has spooked markets with its sagging top-line growth, having missed revenue estimates in three out of four quarters in the last fiscal year. The sneaker giant expects sales to fall by “mid-single digits” this fiscal year - which was not only lower than its previous guidance, but also below analysts’ estimate for almost 1% growth.

Nike Almost Resembled a Value Stock After the Crash

While Nike describes itself as a “growth company,” last month the company’s valuations plummeted to levels that almost resembled a value stock. After the massive crash, its valuation multiples fell even below their COVID-19 lows, which goes to show the extent of the market’s pessimism towards the sneaker giant. 

Nike's valuation multiples have since recovered somewhat, and it now trades at a next 12-month PE multiple of 26.4x, and offers a dividend yield of 1.7%.

Michael Burry Upped His Stake in Alibaba

Michael Burry of “Big Short” fame increased his fund's stake in Alibaba Group Holdings (BABA) in Q2. The fund manager, who famously (and correctly) bet against the U.S. housing market in 2008, had previously added BABA shares during Q1 as well. Notably, Chinese stocks – and in particular, Alibaba – have been out of favor, especially with U.S. investors.

While BABA stock is up 8% in 2024 based on Friday’s closing prices, the returns pale compared to what U.S. tech companies have delivered over the period. Also, the stock has lost almost half of its market cap over the last five years, even as U.S. Big Tech companies are trading close to their record highs.

A slowing Chinese economy that’s taking a toll on its earnings, competition from rivals like Temu parent PDD Holdings (PDD), and a general pessimism towards Chinese stocks has negatively impacted market sentiment towards Alibaba.

However, the stock trades at single-digit NTM PE multiples, which could be attractive for investors who can stomach the higher (and perhaps rising) risk of investing in Chinese companies.

All three stocks we've discussed here rose last week after reports of leading fund managers buying their shares in Q2 – even as the broader market recovery also played a part in their price action. With fund managers backing these underperforming stocks, it's worth having these names on your radar, as well.