One quantitative metric which includes not only the traditional value criterion of a low P/E multiple but also incorporates a company’s upside potential (at the cost of the lack of accuracy that often comes from analyst forecasts) is the PEG ratio. We track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work developing investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can also screen picks from top managers such as billionaire Glenn Dubin of Highbridge Capital Management according to various criteria and treat these stocks as free investment ideas which can then be researched further. Here are Highbridge’s five largest holdings as of the end of March with low five-year PEG ratios (or see the full list of stocks the fund reported owning):
Dubin and his team reported a large position in Cosan Limited (USA) (NYSE:CZZ), a $5.1 billion market cap Brazilian company which produces food products and ethanol from sugar cane. While the stock trades at 23 times its trailing earnings, Wall Street analysts are expecting large increases in the company’s earnings per share. Cosan has been doing quite well, in fact: in its most recent quarterly report, revenue grew 38% compared to the same period in the previous year which contributed to a large percentage increase in net income. While Cosan Limited (USA) (NYSE:CZZ) is dependent on further growth, it may be worth taking a closer look at the company.
Highbridge cut its stake in Hertz Global Holdings, Inc. (NYSE:HTZ) by over 30% but the equipment and auto rental company was still one of the fund’s three largest holdings. The stock price has more than doubled in the last year, in part because of the overall strength of the market (Hertz is tied closely to the overall economy, as shown by a beta of 2.8). The stock is expensive in terms of trailing earnings, though expected improvements in EPS result in a forward P/E of only 10. Billionaire James Dinan’s York Capital Management owned almost 11 million shares of Hertz Global Holdings, Inc. (NYSE:HTZ) according to that fund’s own 13F (find Dinan’s favorite stocks).
Transocean LTD (NYSE:RIG) was another of Dubin’s high upside potential picks with the filing disclosing ownership of 2.9 million shares. Billionaire activist investor Carl Icahn has recently taken a relative large position in the deepwater drilling company, urging management to return more cash to shareholders (research more stocks Icahn owns). Currently, Transocean LTD (NYSE:RIG) trades at 8 times forward earnings estimates and with the sell-side expecting further growth on the bottom line going forward the stock’s five-year PEG ratio is 0.5. We’d be interested in comparing Transocean LTD (NYSE:RIG) to its peers in offshore drilling.
The fund had two equipment rental companies among its top ten picks, with 1.6 million shares of United Rentals, Inc. (NYSE:URI) in its portfolio at the beginning of April. As with Hertz, United Rentals is dependent on macro factors and carries a high beta (3.0 in this case). While the forward P/E is 9, a number of market players are bearish on the stock and as a result the most recent data shows that 16% of the float is held short. SAC Capital Advisors, managed by billionaire Steve Cohen, was buying United Rentals, Inc. (NYSE:URI) between January and March, closing Q1 with 1.1 million shares (check out Cohen’s stock picks).
Highbridge further showed its general market bullishness by increasing its stake in $2.3 billion market cap building materials company Louisiana-Pacific Corporation (NYSE:LPX) to a total of 2.7 million shares. The stock carries trailing and forward P/Es of 23 and 10, respectively, suggesting that it is dependent on higher demand for building materials resulting from a continued recovery in construction and homebuilding in particular. Revenue was up almost 50% in the first quarter of 2013 versus a year earlier. Billionaire Dan Loeb’s Third Point cut its holdings of Louisiana-Pacific Corporation (NYSE:LPX) by 40% during Q1, though the fund still owned 1.8 million shares (find Loeb’s favorite stocks).
Disclosure: I own no shares of any stocks mentioned in this article.
