Stephen Mandel worked at legendary investor Julian Robertson’s Tiger Management until 1997 when he left to launch Lone Pine Capital. Lone Pine now has over $15 billion in assets under management and Mandel himself has become a billionaire. Thanks to 13F filing requirements, we can look at the set of stocks which the fund owned and which have low PEG ratios- a valuation metric which considers both the standard P/E multiple and the expected growth rate of earnings- to come up with a list of high upside potential stock picks from Mandel’s portfolio. Obviously many of these companies will miss earnings projections, as we are working with estimates from Wall Street analysts, but the PEG ratio is still a guide to potential and investors can do further research on any intriguing names anyway. Here are five stocks with low PEG ratios that Lone Pine reported owning in its most recent 13F filing (see the rest of Mandel’s stock picks):
Even though Lone Pine cut its stake in Apple Inc. (NASDAQ:AAPL) during the third quarter of 2012, the fund still owned a little more than 800,000 shares and Apple was one of its ten largest holdings. Apple Inc. (NASDAQ:AAPL) trades at only 12 times trailing earnings, and with the Street expecting solid growth numbers the PEG ratio is only 0.5. We wouldn’t be that optimistic, but we like Apple Inc. (NASDAQ:AAPL)’s position in the tablet and smartphone markets and think that even with modest growth rates the stock would be undervalued at the current price. Apple was the most popular stock among hedge funds during the third quarter (see the full top ten list).
NetEase, Inc (NASDAQ:NTES), a $5.7 billion market cap online gaming and Internet portal in China, was another of Mandel’s picks with Lone Pine reporting a position of 6.2 million shares. Revenue and net income were about flat in the third quarter compared to the same period in 2011, but with the stock trading so cheaply- the trailing P/E is only 10- sell-side growth projections bring the PEG ratio down to 0.8. Orbis Investment Management, which is managed by William Gray, owned over 17 million shares of the stock. It’s possible that worries about the reliability of Chinese companies’ financials are holding the stock price down, and so NetEase might be worth a very close look.
69 hedge funds and other notable investors in our database of 13F filings owned shares of Express Scripts Holding Company (NASDAQ:ESRX), making it the most popular healthcare stock among hedge funds (find more healthcare stocks hedge funds love); Lone Pine had a significant position there. Express Scripts is now back in business as a prescription management partner with Walgreen Company (NYSE:WAG), which seems to already be having a positive impact on its financials. At 13 times consensus earnings for 2013, we would call Express Scripts another candidate for value status.
The fund owned about 860,000 shares of AutoZone, Inc. (NYSE:AZO), which carries trailing and forward P/Es of 15 and 11 as well as a PEG ratio of 0.9. The replacement auto parts store is being valued higher than many other auto related companies which are more exposed to demand, but the pricing might still be considered low particularly as the most recent quarterly report showed growth on both top and bottom lines. Bain Capital’s Brookside Capital initiated a position in the stock during the third quarter (check out more of Brookside’s stock picks).
Mandel and his team more than doubled the size of their position in Dollar General Corp. (NYSE:DG) to a total of 8.3 million shares. Even though the dollar store has been growing rapidly and has little exposure to the broader economy (the beta is only 0.1), its earnings multiples are in the teens. We’d consider it another prospect for future research. Lee Ainslie’s Maverick Capital was also buying the stock (research more stocks Ainslie likes).
