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.
Delphi Automotive PLC (NYSE:DLPH) was another of Einhorn’s top picks with the filing disclosing ownership of almost 8 million shares. As with GM, skepticism about the auto industry (Delphi manufactures auto parts including electrical, electronic, and powertrain components) is holding the stock at value levels but the sell-side expects weak performance to flip to considerable earnings growth. A number of other hedge funds like Delphi: billionaire John Paulson’s Paulson & Co., for example, had 13.5 million shares in its portfolio at the end of December (check out Paulson’s favorite stocks).
The fund added shares of NCR Corporation (NYSE:NCR), a $4.5 billion market cap provider of cash register machines, self-service kiosks, and related products. While earnings have been low at NCR recently, analyst consensus implies a forward P/E of 9 and a five-year PEG ratio of 0.7. Given that recent growth numbers have not been particularly good- revenue rose only 3% last quarter compared to the fourth quarter of 2011- we would need more convincing to recommend buying. Eric Bannasch’s Cadian Capital cut its stake slightly but still owned 6.5 million shares at the end of the fourth quarter.
Greenlight kept its position in ENSCO PLC (NYSE:ESV) constant between the beginning and end of Q$ at 3.8 million shares. ENSCO is a contract offshore driller with a market capitalization of $13 billion. It carries trailing and forward P/Es of 12 and 7, respectively, demonstrating that Wall Street analysts expect strong growth considering the current valuation in the market. The stock also pays a dividend yield of above 3% going by current prices and recent dividend payments. Arrowstreet Capital was moving heavily into the stock last quarter (see more stocks Arrowstreet was buying).
Disclosure: I own no shares of any stocks mentioned in this article.
