Viking Global, a hedge fund managed by billionaire and Tiger Cub Andreas Halvorsen, filed its 13F for the first quarter of 2013 with the SEC in May. These filings disclose many of a hedge fund’s long equity positions in U.S. stocks as of the end of the most recent fiscal quarter; despite the age of this information, we’ve actually found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. We also like to screen individual funds’ filings according to various criteria, including low price-to-earnings multiples, in order to provide initial investment ideas which investors can research further if they see an interesting stock. Here are our brief thoughts on the five largest positions in Viking Global’s portfolio as of the end of March with both trailing and forward P/Es of 13 or lower (or see the full list of Halvorsen’s stock picks).
The fund increased its holdings of LyondellBasell Industries NV (NYSE:LYB) by 74% to a total of more than 13 million shares. The chemicals company experienced a 9% decline in revenue in its most recent quarter compared to the same period in the previous year, and while net income was up we would expect that high growth based on margin improvements alone is not sustainable. Lyondellbasell pays a dividend yield of 3% at current prices, in addition to fairly low P/Es, but we’d note that it is highly exposed to macro activity with a beta of 2.5.
The oil and gas refining and marketing industry has been a popular source of value opportunities for many funds. Viking Global bought 6.7 million shares of Valero Energy Corporation (NYSE:VLO) between January and March. Both the trailing and forward earnings multiples come in at 7, and with Wall Street analysts expecting earnings per share to grow over the next several years the stock’s five-year PEG ratio is 0.8. However, sales were down modestly in the first quarter of 2013 versus a year earlier and of course there are a number of cheap industry peers.
One of these peers is Marathon Petroleum Corp (NYSE:MPC), which Halvorsen also initiated a large position in during Q1 of this year. At least recently this company has been experiencing growth on both top and bottom lines, yet it too qualifies as trading at value levels as its trailing P/E is only 8. We’d be interested in doing more research on the company to see if it might be able to continue its recent growth. Investors should note that, like Valero and other companies in the industry, Marathon has a fairly high beta (at 2.9, specifically).
The Allstate Corporation (NYSE:ALL), the $22 billion market cap insurer, rounds out our list of Viking Global’s cheap picks as the filing disclosed ownership of 4.6 million shares. Allstate carries trailing and forward earnings multiples of 10 and 9, respectively, so the market is pricing in something between stable performance and an actual decline in EPS. Net income was in fact down 7% last quarter compared to the first quarter of 2012 despite rising revenue. We wouldn’t rule it out as a value stock but we would like to see some indication that the financials could improve.
While Halvorsen does have a number of picks with low earnings multiples, many of them have been seeing lower earnings and/or revenue going by recent reports. We actually think that we might avoid the finance and insurance picks at least for now, and even in Lyondellbasell’s case it might be better either to hold off entirely or to check for better deals in chemicals. The downstream oil and gas companies are trading at essentially pure value levels, however, and with Marathon in particular growing its business recently it seems to be worth considering.
Disclosure: I own no shares of any stocks mentioned in this article.
