Value investors often begin their search for attractive stocks by looking for those which are “cheap” in terms of having low price-to-earnings multiples. We maintain a database of quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies (for example, we’ve discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can also screen picks from individual managers in search of potential value opportunities which investors might want to research further. Here are our brief thoughts on the five largest positions in billionaire David Harding’s Winton Capital Management’s portfolio in stocks with both trailing and forward P/Es of 12 or lower (or see the full list of Harding’s stock picks):
The fund increased the size of its position in Northrop Grumman Corporation (NYSE:NOC) to a little more than 600,000 shares during the first quarter of 2013. In the first quarter of 2013, revenue and earnings were down slightly versus a year earlier; it’s been suggested that cuts in U.S. military spending may harm aerospace and defense companies such as Northrop Grumman, at least temporarily. With investors not particularly optimistic about the industry, there are a number of cheap stocks available and Northrop Grumman is no exception with a valuation of 11 times forward earnings estimates.
Another contractor among Winton’s picks is Lockheed Martin Corporation (NYSE:LMT); the filing disclosed ownership of about 370,000 shares of that stock. The dividend yield of 4.2% and the fairly low beta make Lockheed Martin an interesting target for income or defensive investors, as over the long term we’d expect these businesses to be fairly stable. With decent earnings multiples as well and only a slim decline in the company’s sales in Q1 from its levels a year ago, we think it’s worth considering on those grounds as well as being a potential value play.
The 13F shows Harding adding to his stake in Exxon Mobil Corporation (NYSE:XOM), with a total of about 440,000 shares as of the beginning of April. We’d note that while the forward earnings multiple of 11 is low in absolute terms, it does represent a premium to where some other oil majors are valued. Exxon Mobil Corporation (NYSE:XOM) did manage flat earnings numbers in its last quarterly report compared to the first quarter of 2012, even as revenue fell by 13%. Fisher Asset Management, managed by billionaire Ken Fisher, reported a position of 4.6 million shares as of the end of March (find Fisher’s favorite stocks).
Winton owned about 750,000 shares of The Allstate Corporation (NYSE:ALL) according to the filing. The insurance company trades at a small premium to the book value of its equity- the P/B ratio is 1.1- but management has been effective enough at converting its assets into earnings that the P/E multiples are in value territory. The company has been struggling a bit, with little change in revenue and a small decrease in net income, but the stock is still cheap enough that we would be interested in learning more about Allstate and potentially comparing it to its peers.
We’re quite interested in the aerospace and defense companies, with Lockheed Martin the first prospect we’d want to take a look at given its impressive yield. Oil majors are also somewhat attractive at current levels, though as we’ve suggested we aren’t sure we’d agree with Harding that Exxon Mobil Corporation (NYSE:XOM) is the best choice in the industry.
Disclosure: I own no shares of any stocks mentioned in this article.
