One way to measure the upside potential of a stock is with the PEG ratio, which takes into account both the traditional value metric of the price-to-earnings multiple and analyst consensus for earnings growth rates. While analysts aren’t always correct, this at least results in a quantitative metric which can be used to screen stocks. We can also look for stocks with low PEG ratios among hedge funds’ top picks; we maintain a database of 13F filings as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). We looked at the top picks from Tiger Cub fund Tiger Global and here are five of their holdings with low PEG ratios (or see the full list of stocks Tiger Global reported owning):
The fund was selling some of its shares of Apple Inc. (NASDAQ:AAPL) during the quarter, but it still included the tech company as its largest position by market value. Apple Inc. (NASDAQ:AAPL) had lost its place as the most popular stock among hedge funds to American International Group Inc (NYSE:AIG) during Q4 (find more of hedge funds’ most popular stocks) and the share price has fallen 23% in the last year as investors become convinced that lower margins will drive a decrease in net income. This has brought Apple Inc. (NASDAQ:AAPL)’s valuation to 10 times trailing earnings, while the sell-side is still expecting some earnings growth.
Chinese search engine Baidu.com, Inc. (NASDAQ:BIDU) was another of the fund’s top ten picks and another stock where analysts are more bullish than many investors. Specifically, the five-year PEG ratio is 0.5 as a result of earnings multiples in the teens and high reported growth rates; the market is likely worried about Chinese macro conditions and a number of accounting frauds which have been exposed at other companies in the last couple years. Billionaire Ken Fisher’s Fisher Asset Management reported a position of 1.9 million shares in Baidu at the end of December (check out Fisher’s stock picks).
The 13F disclosed a new position of 2.1 million shares in The McGraw-Hill Companies, Inc. (NYSE:MHP), which recently sold its education unit to a private equity fund. It is now a financial information services company which owns brands including Standard & Poor’s and Capital IQ. Its current valuation places the stock at 14 times forward earnings estimates and a five-year PEG ratio of 0.8. JANA Partners, managed by value investor Barry Rosenstein, was another major holder of the stock with a position of 2.2 million shares (research more stocks JANA owns).
TAL Education Group (NYSE:XRS) rounds out our list of high upside potential picks from Tiger Global. According to the filing, the fund owned over 10 million shares of the Chinese tutoring services company at the end of 2012. Of course as with Baidu investors are likely pricing in macro and accounting risk, with the result being that quite impressive growth numbers- its most recent fiscal quarter, which ended in November, showed revenue up 20% versus a year earlier- give a trailing P/E of only 22. Analyst expectations imply a current-year earnings multiple of 16.
Disclosure: I own no shares of any stocks mentioned in this article.
