Ken Heebner’s asset management firm Capital Growth Management is one of the hundreds of hedge funds and other notable investors we track in our database of quarterly 13F filings. We’ve found that 13Fs can be useful sources of investment information; the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and we think that other strategies are possible as well. Of course, investors can also screen individual managers’ picks according to various criteria, including the traditional value metric of low earnings multiples. Read on for our thoughts on Heebner’s five largest holdings in stocks with both trailing and forward P/Es of 14 or lower (or see the full list of the fund’s stock picks).
Capital Growth Management cut its stake in D.R. Horton, Inc. (NYSE:DHI) by 22% but the homebuilder was still one of its five largest holdings by market value at the end of March. The stock is valued at 14 times forward earnings estimates; revenue and net income have been up strongly, but analysts seem to be expecting something of a correction in business. With the housing market depending on the broader economy, D.R. Horton, Inc. (NYSE:DHI) carries a fairly high beta at 1.7. The most recent data shows that 14% of the float is held short.
Heebner and his team initiated a position of over 840,000 shares in Goldman Sachs Group, Inc. (NYSE:GS) between January and March. The investment bank is valued at a small premium to the book value of its equity, with a P/B ratio of 1.1. Goldman Sachs Group, Inc. (NYSE:GS) has done well at converting its assets into net income, however, and as a result it is in value territory with P/E multiples in the 11-12 range. Growth has been slow but the company does not need to improve by much in order to look like a buy. Cliff Asness’s AQR Capital Management was also buying Goldman Sachs Group, Inc. (NYSE:GS) last quarter (find Asness’s favorite stocks).
Rock-Tenn Company (NYSE:RKT) was another of Capital Growth’s cheap picks with the filing disclosing ownership of 1.3 million shares. The $7.3 billion market cap manufacturer of packaging products experienced a large percentage increase in net income in its most recent quarter compared to the same period in the previous fiscal year. Revenue was up only 2%, so high earnings growth is not sustainable, though with a trailing P/E of 13 it’s another potential value play. Sell-side forecasts imply a five-year PEG ratio of 0.9, so analysts expect EPS to rise a bit going forward.
According to the 13F, Heebner bought 2.5 million shares of Textron Inc. (NYSE:TXT), the $7.5 billion market cap aerospace and defense company perhaps best known for manufacturing Cessnas. We’d note that Textron Inc. (NYSE:TXT)’s stock is also quite responsive to fluctuations in market indices, with a beta of 2.0. With trailing and forward P/Es of 13 and 11 respectively, however, it might also be worth considering for investors who are willing to take on the significant macro risk. On the other hand, recent results have not showed much growth at Textron Inc. (NYSE:TXT).
The fund reported owning 970,000 shares of Discover Financial Services (NYSE:DFS) as of the beginning of April. Discover Financial Services (NYSE:DFS) trades at only 11 times its trailing earnings, even though its net interest income and its earnings per share both increased nicely in the first quarter of 2013 versus a year earlier (Discover Financial Services (NYSE:DFS) recently converted its FY to the calendar year). Analysts are cautious here, but again the stock is priced cheaply enough that either modest earnings growth or continued buybacks, let alone both, could make it attractive.
As a result Heebner has actually come up with a number of interesting picks, although some of these stocks do feature high beta statistics and become less appealing for investors whose portfolios are already highly exposed to the market. Discover and Goldman Sachs Group, Inc. (NYSE:GS) in particular stand out for generating more moderate growth rates alongside their low earnings multiples, though of course either of these financial stocks could be compared to their peers- many other megabanks, for example, are also potential value stocks.
Disclosure: I own no shares of any stocks mentioned in this article.