Is SM Energy Company (SM) the Deep Value Stock to Buy Now?
March 15, 2025
We recently published a list of 10 Deep Value Stocks to Buy Now. In this article, we are going to take a look at where SM Energy Company (NYSE:SM) stands against other deep value stocks to buy now.
Deep value investing is a more extreme form of value investing, focusing on stocks that are not just undervalued but significantly mispriced relative to their intrinsic worth. As a contrarian strategy, it seeks companies trading at substantial discounts, often due to temporary setbacks or market inefficiencies. Considered a subset of value investing, deep value investing was pioneered by Benjamin Graham and later refined by Warren Buffett. It targets stocks with extremely low valuations, such as low price-to-earnings (P/E) multiples, low price-to-book (P/B) ratios, and sometimes distressed financial conditions. Given the current macroeconomic landscape—characterized by rising interest rates, inflationary pressures, and increased market volatility—deep value investing has gained renewed relevance as investors search for overlooked opportunities in an increasingly expensive market.
Warren Buffett’s famous mantra, “Be fearful when others are greedy, and greedy when others are fearful,” perfectly encapsulates the essence of deep value investing. This strategy thrives on market inefficiencies, focusing on companies that may be experiencing temporary setbacks due to economic cycles, regulatory challenges, or investor sentiment but have strong potential for long-term recovery. Investors seek businesses with solid fundamentals, strategic shifts, or macroeconomic tailwinds that could serve as catalysts for revaluation.
In a mid-2024 article, GMO LLC’s Asset Allocation Team reaffirmed their conviction in deep value investing, highlighting it as their top long-only investment idea. Rather than relying on traditional labels of “growth” or “value,” they define deep value stocks as those trading significantly below their fundamental worth. While low valuation multiples such as P/E ratios can be indicative of undervaluation, GMO emphasizes that not all low P/E stocks are true bargains—some may be structurally weak—while certain high P/E stocks may still justify their premiums.
GMO’s deep value strategy focuses on the cheapest 20% of stocks relative to intrinsic value, carefully filtering out cyclical traps and low-quality businesses. Their research suggests that in an environment where investor optimism has propelled many stocks to record highs, numerous overlooked deep value opportunities remain. Despite requiring patience, these undervalued stocks present strong potential for absolute and relative returns.
Portfolio managers at the Heartland Mid Cap Value Fund recently cautioned against investing in speculative stocks with inflated valuations, arguing that current market trends of extreme valuation growth and diminished risk aversion are unsustainable. Despite short-term underperformance, they remained confident that disciplined value investing would deliver superior long-term returns.
In today’s relatively expensive market, deep value stocks stand out as attractive opportunities amid widespread over-valuation. Many fundamentally strong businesses have been unfairly punished due to temporary headwinds, making them attractive investments for long-term value seekers. However, deep value investing is not without its challenges—investors must exercise patience and conduct thorough due diligence to distinguish between genuine value opportunities and structurally declining companies.
For those willing to navigate short-term volatility in pursuit of long-term gains, deep value investing offers a promising path.
To identify the 10 deep value stocks to buy now, we started by screening U.S.-listed companies with a market capitalization over $2 billion. We then applied three key deep-value criteria: a forward price-to-earnings (P/E) ratio of 10 or lower; return on equity of at least 10%; and a dividend yield of at least 1%. Of the shortlisted stocks, we then ranked the top 10 stocks based on their forward P/E ratio, placing those with the lowest P/E at the top. Additionally, we also included data on hedge fund holdings in these companies as of Q4 2024 to provide further insight into investor interest.
Note: All pricing data is as of market close on March 10.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A large oil tanker on the horizon, highlighting the wealth of resources this company brings.
Fwd. P/E: 4.1
Dividend Yield: 2.9%
Number of Hedge Fund Holders: 38
SM Energy Company (NYSE:SM) is an oil and gas exploration and production company with operations in the Permian Basin and the South Texas Eagle Ford region.
The company’s long-term strategy is centered on generating free cash flow and returning capital to shareholders through debt reduction and share repurchases. Additionally, it focuses on high-margin production growth and cost-efficient resource development. In its Q4 2024 earnings report, SM Energy Company (NYSE:SM) posted strong production results, with Q4 production volumes reaching 208 thousand barrels of oil equivalent per day (MBoe/d), marking a 22% sequential increase. For the full year 2024, production rose 12% compared to 2023, and the company generated $485 million in adjusted free cash flow. Looking ahead, management has provided guidance for net production volumes to range between 200-215 MBoe/d.
Although Q4 results were solid, the outlook was not as strong, according to Raymond James analyst John Freeman. In his March 10 report, he projected weaker oil prices in the near term, leading him to lower his price target on SM Energy Company (NYSE:SM) from $59 to $40. However, he maintained an Outperform rating on the stock. Conversely, in late February, Roth MKM analyst Leo Mariani reiterated a Buy rating on the shares, setting a price target of $50, representing a potential upside of 72%.
Overall, SM ranks 3rd on our list of deep value stocks to buy now. While we acknowledge the potential of SM to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and 30 Best Stocks to Buy Now According to Billionaires
Disclosure: None. This article is originally published at Insider Monkey.
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