One measurement of a stock’s upside potential is its PEG ratio, which corrects the price-to-earnings multiple for the analyst consensus earnings growth rate. If the PEG is less than 1, then the stock is generally considered to be undervalued assuming analyst expectations are correct. Billionaire George Soros filed his 13F in February, disclosing many of his long equity positions as of the end of December; we track 13Fs as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an excess return of 18 percentage points per year) and so we can screen his top picks by their PEG ratio. Here are five stocks which Soros had at least $90 million invested in at the end of 2012 and which have five-year PEG ratios less than 1 (or see the full list of stocks Soros reported owning):
Soros was buying shares of Citigroup Inc. (NYSE:C) in the fourth quarter of 2012, and at 8.1 million shares the bank was his largest stock holding by market value. According to some criteria it is a good value stock; specifically, there is a considerable discount to the book value of its equity given the P/B ratio of 0.8. In trailing earnings terms Citigroup is valued higher than some of its peers, though analysts expect enough improvement that the PEG ratio comes out to 0.8 as well. Billionaire Ken Griffin’s Citadel Investment Group was also buying Citigroup and had 6.5 million shares in its portfolio (check out Griffin’s stock picks).
American International Group Inc (NYSE:AIG) was the new most popular stock among hedge funds for last quarter (find more of hedge funds’ favorite stocks) and even though Soros was selling he still owned close to 9 million shares at the beginning of January. AIG is even cheaper in book terms than Citigroup, with a P/B of 0.6, though despite the significant hedge fund interest mutual funds seem cooler on the bailed-out insurer. It’s another stock where recent earnings have not been particularly high for the market cap, but the assets are at a discount and the sell-side is expecting significant earnings growth.
Read on for three more stocks Soros reported owning:
The 13F showed a 55% increase in holdings of Delta Air Lines, Inc. (NYSE:DAL) to a total of 9.6 million shares. We are interested in Delta since it would benefit from the industry consolidation resulting from US Airways Group, Inc. (NYSE:LCC)’s acquisition of American Airlines without dealing with integration risk itself. The stock trades at 6 times forward earnings estimates, as the market has much lower expectations than analysts do. Billionaire David Tepper’s Appaloosa Management is bullish on airlines and had over 10 million shares in its portfolio at the end of 2012 (research more stocks Tepper likes).
$1.4 billion market cap patent portfolio manager Acacia Research Corporation (NASDAQ:ACTG) was another of Soros’s picks with the filing disclosing ownership of almost 4 million shares. The stock is down 29% in the last year; while we can see from the forward P/E multiple and PEG ratio that Acacia is expected to grow over the next several years, it’s of course critical for interested investors to become more informed about the status of its patents before considering any moves. Ascend Capital was another fund in our database of filings which reported a position in Acacia.
Soros more than doubled the size of his position in Apple Inc. (NASDAQ:AAPL) to a total of over 180,000 shares. A number of hedge funds were selling Apple Inc. (NASDAQ:AAPL) between October and December, which helped pave the way for AIG to rise to the #1 place on our most popular stocks list; Greenlight Capital, managed by billionaire David Einhorn, was one of those actually adding shares (see more stocks Einhorn was buying). Apple Inc. (NASDAQ:AAPL) trades at only 10 times trailing earnings and has a large cash haul; investors are pricing in a decline in earnings, leaving the company room to beat expectations with even mediocre performance.
Disclosure: I own no shares of any stocks mentioned in this article.