Price-to-earnings multiples are crude metrics, but are still at the core of many value investing approached because they concisely put a company’s market valuation in the context of its current performance. In particular, we think they are useful for narrowing down a cluster of stocks into a more reasonable number. Investors can then briefly analyze these companies and then move them on to the next stage of their investment process if they pass muster. Here are five stocks which billionaire Stanley Druckenmiller reported owning in his most recent 13F filing which have both trailing and forward P/E multiples of 13 or lower (or research more stocks Druckenmiller liked):
Druckenmiller’s top pick was Exxon Mobil Corporation (NYSE:XOM), initiating a position of 1.3 million shares. Exxon Mobil made our list of the most popular energy stocks among hedge funds in the third quarter of the year (see the rest of the top ten list). Its 2013 earnings multiple of 11 represents a premium to many oil majors, though it is something of a market leader for the industry and while it did report declines in revenue and earnings in its most recent quarterly report these decreases tended to be steeper at its peers. We think that the company could make for a good long term stock pick.
Two banks and an energy services company completed our list of cheap Druckenmiller picks:
It wasn’t all energy: Wells Fargo & Company (NYSE:WFC), which was one of the ten most popular stocks among hedge funds, was another of Druckenmiller’s favorite stocks. The bank trades at a premium to the book value of its equity, with a P/B ratio of 1.3, while peers such as Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) are priced at book value or lower. This is because investors have more confidence in Wells Fargo, and also because the gap in terms of earnings multiples is very small. The trailing P/E at Wells Fargo is only 10, well in line with where other megabanks trade.
SunTrust Banks, Inc. (NYSE:STI), meanwhile, is cheap on both a book and an earnings basis. The P/B ratio is only 0.8, the stock trades at 8 times trailing earnings, and analyst estimates over the next several years imply a five-year PEG ratio of 0.7. Revenue was up nicely in the fourth quarter of 2012 compared to the same period in 2011, which caused a considerable improvement in earnings. Druckenmiller owned 1.8 million shares of SunTrust, while billionaire George Soros increased his own holdings by 71% between July and September to just over 4 million shares (find more stocks Soros was buying). We think that investors should consider SunTrust as a value stock.
Druckenmiller was also buying Halliburton Company (NYSE:HAL) during the third quarter of 2012. Halliburton trades at 13 times earnings, whether we consider its historical results or analyst estimates for the current year. The company recently reported a decline in earnings (primarily due to North American operations) though the results beat analyst expectations and the stock rose 5% on the day. Halliburton still carries lower multiples than peer Schlumberger Limited. (NYSE:SLB), but the gap has been narrowing. Omega Advisors, managed by billionaire Leon Cooperman, was another major shareholder of Halliburton (see more stocks Cooperman likes).
