By evaluating 13F filings from hedge funds and other notable investors (these filings disclose many long equity positions as of the end of the previous quarter, we can develop investment strategies despite the inherent delay. 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 (learn more about our small cap strategy). We can also use 13Fs to see the top picks in hedge fund portfolios, which investors may be interested in using as initial ideas, and to narrow a list of top picks further with other screening techniques. Here are five stocks which billionaire David Tepper’s Appaloosa Management (see more of his stock picks) reported a large position in which satisfy the traditional value criteria of low trailing and forward P/E multiples (defined in this case as 11 or lower):
Appaloosa’s top pick at the end of December was Apple Inc. (NASDAQ:AAPL), after having increased its holdings by 75% in Q4. American International Group Inc (NYSE:AIG) passed Apple Inc. (NASDAQ:AAPL) to become the most popular stock among hedge funds in the fourth quarter (find more of the most popular stocks among hedge funds) as investors increasingly worry about Apple’s margins. Wall Street analysts are bullish, with their forecasts implying that Apple Inc. (NASDAQ:AAPL)’s five-year PEG ratio is only 0.5. We think that the sell-side is being optimistic, but even if Apple keeps its earnings about flat it should be a good value.
Tepper and his team owned over 11 million shares of US Airways Group, Inc. (NYSE:LCC), as the fund has been generally positive on airlines despite their poor reputation as investments. US Airways is merging with bankrupt American Airlines, and this consolidation has the potential to increase industry-wide fares. US Airways has more than doubled in the last year, yet its current price is still only 5 times consensus earnings for 2014. Billionaire Stanley Druckenmiller initiated a position of 4 million shares between October and December (check out more stocks Druckenmiller was buying).
David Einhorn also likes this Tepper pick:
General Motors Company (NYSE:GM) was another of Appaloosa’s cheap stock picks as the fund reported a position of 5.4 million shares (though this was down 10% from three months earlier) and the current trailing earnings multiple is 10. A number of value investors are taking positions in automakers; for example, billionaire David Einhorn of Greenlight Capital named GM one of his longs at the Value Investing Congress in October (research more stocks Einhorn likes). These bulls on GM and other auto related stocks believe that U.S. consumers will soon need to replace their aging cars even if macro activity does not pick up.
The fund seems on board with this thesis in general as it also had a large position in Ford Motor Company (NYSE:F) at the beginning of January. Ford trades at 9 times trailing earnings, which actually represents a small discount to GM at least in terms of results in the last year. However, earnings were down substantially last quarter compared to the fourth quarter of 2011 and any comparison between the two- as well as to other peers such as Toyota Motor Corporation (NYSE:TM) or Honda Motor Co Ltd (NYSE:HMC) would have to go into more depth. Tiger Cub Robert Bishop’s Impala Asset Management was another major holder of the stock.
Tepper bought 4.3 million shares of HCA Holdings Inc (NYSE:HCA) in the fourth quarter after his fund had not owned any shares at the end of September. HCA is a $17 billion market cap hospital company, which places its valuation at trailing and forward P/Es of 11 and 10 respectively. The stock is up 45% in the last year. Billionaire John Paulson’s Paulson and Co. sold 13% of its shares of HCA in the fourth quarter, but still had almost 7 million shares in its portfolio at the end of 2012 (see more stocks Paulson owns).
Disclosure: I own no shares of any stocks mentioned in this article.