Analyst forecasts aren’t always correct, but the PEG ratio- which puts a stock’s P/E multiple in the context of its expected growth rate- is at least one way to screen for stocks with high upside potential (since a low PEG indicates that the stock is undervalued according to earnings expectations). We track hedge funds’ quarterly 13F filings for a variety of purposes, including the development of investment strategies (the most popular small cap stocks among hedge funds produce an excess return of 18 percentage points per year on average). So we can look at a hedge fund manager’s top picks with low PEG ratios and provide a brief overview so that investors can do further research on any interesting companies. Here are five stocks while billionaire David Einhorn’s Greenlight Capital owned at the end of December with low PEG ratios (or see the full list of Einhorn’s stock picks):
Einhorn’s largest holding by market value was his 1.3 million shares of Apple Inc. (NASDAQ:AAPL). Even though many hedge funds were selling Apple Inc. (NASDAQ:AAPL) last quarter, and as a result the company lost its place as the most popular stock among hedge funds (find more of the most popular stocks), Greenlight actually added shares. At 10 times trailing earnings, with analyst consensus for considerable growth, Apple Inc. (NASDAQ:AAPL) is cheap from an analyst perspective but the market is pricing in a decline in earnings. We have lower expectations than the Street but we would still consider Apple to be a potential value stock.
At the Value Investing Congress in October Einhorn had named General Motors Company (NYSE:GM) one of his two favorite long picks, and it is one of Greenlight’s largest holdings by market value at over 21 million shares. Warren Buffett also liked GM, with Berkshire Hathaway’s 13F reporting a position of 25 million shares at the end of December (research more stocks Buffett likes). General Motors also trades at 10 times trailing earnings as the market is skeptical of future growth, and again Einhorn’s bullishness is in line with that of analysts who think that investors are underestimating the company. We would be interested in comparing GM to Ford Motor Company (NYSE:F) and other peers.