One way to estimate the upside potential of a stock is to look for a low PEG ratio, a financial metric that adjusts the traditional P/E multiple according to the consensus earnings growth rate from Wall Street analysts. Of course, because the PEG ratio is based on expected earnings growth, it’s not a measure of a stock’s upside, but its upside potential if it does manage to hit analyst targets- an important distinction. Because of this it’s best to treat the PEG ratio as a screen for stocks which can then be evaluated further. Here are five stocks which billionaire George Soros had over $90 million invested in at the end of the third quarter and which had low PEG ratios (see the full list of positions Soros reported):
Soros’s top stock holding was American International Group, Inc. (NYSE:AIG), initiating a position of 15 million shares. Thanks to Soros and a number of other investors, AIG broke onto our list of the ten most popular stocks among hedge funds for the third quarter of 2012 (see the full top ten rankings). AIG trades at 10 times consensus earnings for 2013, and sell-side expectations for growth over the next several years result in a PEG of 0.4. The insurer is also valued at about half the book value of its equity, providing another estimate of its upside potential. Overall we think that AIG is well worth considering as a value stock.
Soros also bought shares of Express Scripts Holding Company (NASDAQ:ESRX), closing the quarter with 2.2 million shares in his portfolio. Partly because of the potential to recover from its issue with Walgreen Company (NYSE:WAG), Express Scripts was the most popular healthcare stock among hedge funds for the quarter (find more healthcare stocks hedge funds loved) and its PEG ratio is 0.8. The company is supposed to earn $4.20 per share this year, and the current stock price is only 13 times that figure; therefore, as long as Express Scripts gets back on track this year it might end up a good value.
SunTrust Banks, Inc. (NYSE:STI) is another financial which is priced at a discount to book value (P/B ratio of 0.8) and which has a low PEG ratio (at 0.5). Soros increased his stake by 71% between July and September, reporting just over 4 million shares in his 13F filing. The stock is valued at 10 times trailing earnings, after very high- but almost certainly not sustainable- growth rates in the third quarter of 2012 compared to the same period in 2011. Fellow billionaire Stanley Druckenmiller initiated a position in the stock (check out Druckenmiller’s stock picks).
Two more picks from Soros, including a well known automaker:
Soros owned 3.2 million shares of Acacia Research Corporation (NASDAQ:ACTG), a $1.3 billion market cap patent portfolio manager and services provider. The stock is down 38% in the last year, a slightly higher decline than Acacia’s fall in revenue. However, Wall Street analysts believe that the company will recover from its recent troubles with their earnings projections generating a 2013 P/E of 11 and a low PEG ratio. We think that we would want to see better results from the company.
Soros increased his stake in General Motors Company (NYSE:GM) to a total of 4.1 million shares. GM, like AIG, made our list of hedge funds’ favorite stocks for Q3 2012; Greenlight Capital’s billionaire manager David Einhorn has used it as one of his buy recommendations recently, and that fund had GM as one of its top picks at the end of the third quarter (research more stocks Einhorn likes). GM is cheap, with trailing and forward P/Es of 11 and 8 respectively, but the company has been struggling more than some of its peers and we’d suggest that investors at least look elsewhere among automakers and auto related companies before joining top investors in the stock.
Disclosure: I own no shares of any stocks mentioned in this article.
