The PEG ratio allows investors to consider a stock’s P/E ratio- generally used as the basic value metric- with how fast the company’s earnings are expected to grow in the future. Clearly, a stock is a better buy if it is going to grow faster than another with the same P/E multiple. The trouble is that expected earnings are based on analysts’ estimates, which aren’t always accurate. Still, looking for low PEG ratios is a good way to identify stocks with high upside potential and decide if they are worth considering further. Here are five stocks with low PEG ratios and which billionaire David Tepper’s Appaloosa Management had at least $50 million invested in according to its 13F for the third quarter of 2012 (see the full list of Tepper’s favorite stocks):
US Airways Group, Inc. (NYSE:LCC) was of Tepper’s ten top stock holdings as Appaloosa increased its stake to 13.6 million shares. The airline trades at 4 times earnings- whether we consider trailing results or consensus for 2013- so this is one case where analysts are in strong disagreement with the market, particularly given sell-side expectations of earnings growth over the next several years. In fact, 18% of the outstanding shares are held short. Fellow billionaire George Soros also bought shares of US Airways during the third quarter (find more stock picks from George Soros). We think it is a possible value stock.
The same is more or less the case for Delta Air Lines, Inc. (NYSE:DAL). Short interest is cooler here, but investors’ fear of bankruptcy-prone airlines keeps the stock at 7 times trailing earnings. Consensus forecasts are for good earnings growth, so the PEG ratio ends up being very low here. Appaloosa bought shares of Delta last quarter, as did Tiger Cub John Griffin’s Blue Ridge Capital (check out more stocks Blue Ridge was buying). We might actually prefer Delta as an airline stock, as US Airways seems likely to buy American out of bankruptcy and that will create integration risk.
Appaloosa was also fine exposing itself to auto demand, reporting ownership of 14.3 million shares of The Goodyear Tire & Rubber Company (NYSE:GT). Goodyear is highly leveraged and has high pension obligations, and combined with being auto related its beta is 2.1. The stock trades at only 6 times forward earnings estimates, and there are expectations of moderate growth here as well, but we think that we would be cautious and might prefer other auto related stocks. SAC Capital Advisors, managed by billionaire Steve Cohen, increased its own position in the stock to 5.7 million shares at the end of September (research more stocks Cohen likes).
American International Group, Inc. (NYSE:AIG) was heavily bought by hedge funds last quarter, placing it on our list of the most popular stocks among hedge funds (see the full rankings). Tepper initiated a position in the stock between July and September. AIG carries a forward P/E of 10, and growth expectations imply a five-year PEG of 0.4. The insurer also looks like a good value from a book perspective, as it trades at only half the book value of its equity.
Other than a position in an ETF tracking the NASDAQ, Appaloosa’s largest 13F position was its roughly 520,000 shares of Apple Inc. (NASDAQ:AAPL). Apple was the most popular stock among hedge funds last quarter. While billionaire David Einhorn’s Greenlight Capital sold shares, it still owned 1.1 million shares at the end of the quarter and Apple was the fund’s largest holding (find Einhorn’s favorite stocks). The trailing and forward P/Es here are 12 and 9, respectively, as Wall Street analysts expect the tech company’s growth to continue to be strong while the market apparently doesn’t think net income can go any higher. The PEG ratio is 0.5, showing just how wide the gap is between different perspectives on Apple. We would put ourselves somewhere between these two views, expecting low growth over the next several years, and that makes Apple a buy from our point of view.
