Six to seven weeks after the end of each quarter, hedge funds file 13Fs with the SEC; these filings disclose many of their long equity positions as of the end of the last quarter. One way to use this information is to compile many funds’ portfolios and use the data to develop investment strategies; for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (read more about our research on small cap picks). It’s also common for investors to use picks from top investors similarly to a stock screen, identifying names which can then be researched further, and we can combine ownership by a hedge fund with traditional value criteria. Here are billionaire Kovner’s Caxton Associates’ five largest holdings which carry both trailing and forward price-to-earnings multiples less than 12 (or see more of Kovner’s stock picks):
One of Kovner’s top picks was General Motors Company (NYSE:GM), with the filing reporting a position of 2.5 million shares. This is more than double what his fund had owned at the end of September. GM made our list of the most popular stocks among hedge funds for the fourth quarter of 2012 (find more stocks hedge funds love), with many value investors arguing that U.S. consumers will have to replace their aging cars soon and that the auto industry will be able to capitalize on that demand. GM currently trades at 9 times trailing earnings, and its revenues ticked up slightly last quarter compared to the fourth quarter of 2011.
Here’s another big bank that Kovner liked:
A slightly less reliable, but also cheaper, bank was another of Kovner’s favorite stocks: JPMorgan Chase & Co. (NYSE:JPM), which Caxton owned 1.1 million shares of at the end of 2012. JPMorgan Chase is priced right about at book value, and at a slight discount to Wells Fargo at 10 times its trailing earnings. Of course, the bank does not share its peer’s reputation though it would generally be considered safer than say Citigroup or Bank of America. Business has also been doing well; in the fourth quarter of 2012 JPMorgan Chase experienced nearly 20% revenue growth versus a year earlier.
The fund increased its holdings of Ford Motor Company (NYSE:F) to 3.4 million shares as well as buying GM, showing that it is generally bullish on autos. The stock posts trailing and forward P/Es of 9 and 8, respectively, so it is valued about the same as GM on the basis of trailing earnings but analysts are forecasting lower growth. Still, even the cooler projections generate a five-year PEG ratio of less than 1 and any general recovery of the auto market would be expected to benefit both companies.
Regions Financial Corporation (NYSE:RF), a regional bank with a market capitalization of $11 billion, rounded out our list of Caxton’s cheap stock picks. This bank carries a significant discount to the book value of its equity: the P/B ratio is 0.7. Regions is highly sensitive to the broader economy, as shown by the stock’s beta of 2.3. The trailing P/E here is 11 so the valuation in earnings terms is well in line with the larger banks we’ve discussed even though the market value is well below what Regions estimates its assets are worth.
Disclosure: I own no shares of any stocks mentioned in this article.
