We primarily track 13F filings from hedge funds and other notable investors as part of our work researching investments strategies (for example, we have found that the most popular stocks among hedge funds earn an average excess return of 18 percentage points per year). However, we also like to see what successful fund managers’ favorite stocks are and treat this information similarly to a stock screen. We can also combined ownership by a top manager with other screens including a low PEG ratio (which incorporates both the price-to-earnings multiple and analyst consensus earnings growth rates). Assuming the analysts are correct in their forecasts, the PEG is one way to measure a stock’s upside potential. Here are five stocks with low PEG ratios that billionaire James Dinan’s York Capital Management owned at the end of December (or see the full list of Dinan’s stock picks):
The fund’s top single-stock position was American International Group Inc (NYSE:AIG), reporting a position of 8.8 million shares. Between a number of hedge funds buying AIG last quarter and those selling Apple Inc. (NASDAQ:AAPL), AIG became the most popular stock among hedge funds (find more of hedge funds’ favorite stocks). The insurer trades at a significant discount to the book value of its equity with a P/B ratio of 0.6. It also looks potentially cheap in earnings terms, with the current price representing a forward P/E of 9.
See three more stocks Dinan likes with low PEG ratios, including Apple:
Citigroup Inc. (NYSE:C) was another of Dinan’s top picks- the 13F disclosed ownership of 2.7 million shares in the bank following a large increase in Q4- and with a five-year PEG ratio of 0.8 it qualifies as a stock with upside potential. Net income increased 25% in its most recent quarter compared to the same period in the previous year; however, we’d note that many other large banks look cheap including some other which have been strong performers recently. Citi’s P/B ratio is 0.7, so it is being priced lower than the book value of its equity as well.
Dinan and his team were adding shares of Apple Inc. (NASDAQ:AAPL) between October and December, closing 2012 with about 110,000 shares in their portfolio. Following the decline in its stock price Apple Inc. (NASDAQ:AAPL) carries trailing and forward P/Es of 11 and 9, respectively. There is a significant gap between market expectations (which look to be pricing in a decline in earnings, particularly considering Apple’s large cash position) and those of the sell-side where forecasts call for significant growth. Even underperforming Street numbers, then, could be positive for the stock.
York had 2.7 million shares of Chemtura Corp (NYSE:CHMT) in its portfolio at the beginning of January. Chemtura is a $2.1 billion market cap specialty chemicals and materials company. It’s another company whose stock price is sensitive to changes in broader market indices, with a beta of 2.5. Wall Street analysts are expecting high growth over the next few years: Chemtura trades at 21 times trailing earnings, but the forward P/E is only 11.
Popular stocks Apple and AIG are at least worth checking out, in our view, as market expectations are low enough that the companies have quite a bit of upside. Citi also looks interesting but we would want to compare it to other large banks including JPMorgan Chase and Wells Fargo. Chemtura and Hertz carry the risk of exposure to industrial activity and with their “upside potential” coming from high growth expectations rather than current value levels we would be more careful when researching those companies.
Disclosure: I own no shares of any stocks mentioned in this article.
