The PEG ratio takes into account both a stock’s P/E multiple and analyst expectations for future earnings growth, and therefore serves as one way to measure its upside potential rather than to only compare the stock’s valuation to trailing earnings (of course, analyst forecasts aren’t always correct). We like to look for stocks with low PEG ratios in the portfolios of top investors such as billionaire Andreas Halvorsen’s hedge fund Viking Global (we track these funds’ portfolios through quarterly 13F filings, and also use this information to help us develop investing strategies- we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). Read on for our quick take on the five largest positions in Viking’s portfolio as of the end of March with five-year PEG ratios of 1.0 or lower (or see the full list of stocks the fund reported owning).
Halvorsen increased his stake in Michael Kors Holdings Ltd (NASDAQ:KORS) to a total of over 12 million shares. Kors is a high growth company, with revenue rising 57% in the fourth quarter of its most recent fiscal year (which ended in March) versus a year earlier and earnings rising over 130%. The market is pricing in some future growth at a trailing P/E of 32, but analysts are expecting strong enough performance over the next several years that the PEG ratio falls below 1. Billionaire Stephen Mandel’s Lone Pine Capital reported a position of 8.1 million shares in its own 13F (check out Mandel’s stock picks).
Viking Global initiated a position of 6.7 million shares in Valero Energy Corporation (NYSE:VLO), a $19 billion market cap oil and gas refining and marketing company. The stock is valued at 6 times trailing earnings; at a valuation that low the company can even handle a modest decline in net income and still prove undervalued. With the sell-side actually predicting an improved bottom line here, the PEG ratio comes in below 1. Renaissance Technologies, whose founder Jim Simons is now a billionaire, increased its holdings of Valero between January and March as well (research more stocks Renaissance was buying).
Halvorsen and his team also liked Marathon Petroleum Corp (NYSE:MPC) as a downstream oil and gas company which analysts consider to have high upside potential. Similarly to Valero, the five-year PEG ratio of 0.7 results from earnings multiples in clear value territory (both the trailing and forward P/Es are 7) with a sell-side expectation that business will improve. Sales and net income grew at double-digit rates in its most recent quarterly report compared to the first quarter of 2012. D.E. Shaw, a large hedge fund managed by billionaire David Shaw, owned 3.1 million shares of Marathon Petroleum at the end of Q1.
Citigroup Inc. (NYSE:C) rounds out our list of Viking Global’s high upside potential picks with the filing disclosing ownership of 5.4 million shares. The stock has risen over 70% in the last year, and with analysts expecting earnings to continue to rise as they have done over that period Citigroup trades at 9 times forward earnings estimates. With Citi trading at the discount to the book value of its equity as well, it’s worth considering against other large banks in our view. Billionaire David Tepper’s Appaloosa Management had 8.5 million shares of Citigroup in its portfolio (find Tepper’s favorite stocks).
Disclosure: I own no shares of any stocks mentioned in this article.
