We track 13F filings from hedge funds and attempt to find ways to make the provided information useful despite the inherent lag (these filings disclose many of a hedge fund’s long equity positions at the end of a quarter, but are only made public six to seven weeks later). We have found that it is possible to develop investment strategies based on 13Fs; for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (read more about our small cap strategy). We can also look at the top picks of well-known investors such as billionaire David Einhorn of Greenlight Capital in a number of areas, including the traditional value criteria of low price-to-earnings multiples (see Einhorn’s stock picks). Here are five of Greenlight’s largest holdings as of the end of December in stocks with both trailing and forward P/Es of 10 or lower:
Einhorn’s top pick as of the end of the fourth quarter was Apple Inc. (NASDAQ:AAPL), and he actually increased his holdings by 20% to a total of 1.3 million shares. Other hedge funds were less bullish on Apple Inc. (NASDAQ:AAPL), with enough selling out of the stock completely that it dropped to the #2 slot in our list of the most popular stocks among hedge funds (AIG is the new #1). Wall Street analysts remained loyal to the consumer technology, with their earnings forecasts implying a forward P/E multiple of 9 and a five-year PEG ratio of only 0.5. We certainly don’t expect Apple Inc. (NASDAQ:AAPL)’s growth to be that high but the stock is cheap enough that it only needs to maintain its current business.
Find three more cheap stock picks from David Einhorn:
Greenlight was buying Aetna Inc. (NYSE:AET) between October and December as well, and closed 2012 with a total of 6.5 million shares. Aetna trades at 10 times trailing earnings; many health insurers carry low P/Es as investors worry about future government regulations. We’d note that fellow health insurer Cigna Corporation (NYSE:CI), which has a slightly higher trailing P/E, was another top pick in Einhorn’s portfolio. Billionaire John Paulson’s Paulson & Co. initiated a position of 4.5 million shares in Aetna during the fourth quarter of 2012 (check out more stocks Paulson was buying).
Seagate Technology PLC (NYSE:STX) was another of the fund’s top picks. In the fiscal quarter ending in December- the second of its fiscal year- Seagate reported a 13% decline in net income versus a year earlier though revenue was up. In quantitative terms the stock looks quite cheap, at 6 times consensus earnings for the fiscal year ending in June 2014, and the dividend yield is high as well. However, about 10% of the outstanding shares are held short as a number of market players are bearish. Renaissance Technologies, founded by billionaire Jim Simons, was another major holder of Seagate (research more stocks Renaissance likes).
Einhorn and his team owned about 26 million shares of Xerox Corporation (NYSE:XRX), which is declining as a business (though revenue last quarter was down only slightly compared to the fourth quarter of 2011) and is priced cheaply as a result. Specifically, the trailing and forward P/Es are 10 and 7 respectively; note that this means that the sell-side is expecting net income to rise over the next couple years. Glenview Capital, managed by Larry Robbins, trimmed its stake slightly but still owned over 34 million shares of Xerox at the end of December.
Disclosure: I own no shares of any stocks mentioned in this article.
