One way to quantitatively measure a stock’s upside potential is with the PEG ratio, which incorporates both the P/E multiple and analyst consensus estimates of earnings growth. While this metric introduces some uncertainty, as analyst projections aren’t always accurate, it does at least provide a way to take a company’s growth prospects into account. We can also use our database of 13F filings, which we use to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) to further screen for low PEG stocks that a particular fund liked. Investors can then review this stock screen and do further research on any interesting names. Here are five stocks which billionaire Dan Loeb’s Third Point had at least $50 million invested in at the end of December with low five-year PEG ratios (or see the full list of stocks Third Point reported owning):
The fund owned 10 million shares of Delphi Automotive PLC (NYSE:DLPH) according to its 13F. The auto parts company, which specializes in electrical, electronic, and powertrain components, is trading cheaply along with many other companies tied to auto demand at a trailing P/E of 13. Revenue and earnings were down in the fourth quarter of 2012 versus a year earlier, though analysts are optimistic on autos in general and Delphi Automotive PLC (NYSE:DLPH) specifically resulting in a PEG ratio of 0.6. Billionaire John Paulson’s Paulson & Co. cut its stake in Delphi Automotive PLC (NYSE:DLPH) but still owned over 13 million shares at the end of December (see Paulson’s stock picks).
See three more stocks Loeb liked:
In December, billionaire Bill Ackman of Pershing Square gave a presentation arguing that Herbalife Ltd. (NYSE:HLF) was a pyramid scheme and might either be shut down by various national governments or run out of addressable markets. The stock dived, and it seems that Third Point may have taken advantage of that fall in price: it bought 3.1 million shares of the company in the fourth quarter of 2012. Wall Street analysts also seem to be in disagreement with Ackman, with their expectations suggesting significant growth on the bottom line over the next several years.
Third Point was selling some of its shares of $3.2 billion market cap industrial equipment wholesaler WESCO International, Inc. (NYSE:WCC) but still had a little under 1.4 million shares in its portfolio at the beginning of January. WESCO trades at a premium to the companies we’ve mentioned thus far in terms of its trailing earnings, with a P/E of 18. Its upside potential is therefore much more dependent on growth. The most recent data shows that 19% of the outstanding shares are held short. Alan Fournier’s Pennant Capital Management was another major shareholder in WESCO (check out more stocks Pennant owns).
International Paper Company (NYSE:IP) rounds out our list of Loeb’s picks with high upside potential; while that company’s trailing earnings have been low, this has been in part due to special items. With analysts expecting those to subside, and the industry in general to improve, International Paper trades at only 9 times forward earnings estimates. We are, however, skeptical and would worry that analysts are being too optimistic about the paper industry in particular. Senator Investment Group, managed by Doug Silverman, recently reported a large position in International Paper (research more stocks Senator has been buying).
Disclosure: I own no shares of any stocks mentioned in this article.
