We use our database of 13F filings from hedge funds and other notable investors for a variety of purposes. The information in 13Fs can be used to help develop investment strategies; we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year and we think that more techniques are possible as well. Of course, many investors treat ownership by a particular investor similarly to a stock screen, using it as a list of recommendations and then doing more research on any names which seem interesting. We can also combine ownership with other criteria, including a low PEG ratio (a value metric which takes into account both the P/E multiple and the analyst consensus growth rate). Here are five stocks which billionaire Julian Robertson owned at the end of December with low five-year PEG ratios (or see the full list of Robertson’s stock picks):
One of Robertson’s largest holdings by market value was his approximately 680,000 shares of Ocwen Financial Corp (NYSE:OCN), which originates and services mortgage loans. With the real estate market expected to improve over the next several years, the sell-side is expecting high earnings growth for the company. Revenue increased 51% in the fourth quarter of 2012 versus a year earlier, so Ocwen is at least moving in the right direction. Analyst consensus implies a forward P/E of only 7, and while the company is in a risky business we think it is worth further research.
In the fourth quarter of 2012, Robertson initiated a position of almost 390,000 shares in Dollar Tree, Inc. (NASDAQ:DLTR). The dollar store experienced double-digit growth rates on both top and bottom lines last quarter compared to the fourth quarter of 2011, and at a trailing earnings multiple of 17 it is only somewhat more expensive than big-box discount retailers. With growth expected to continue, the five-year PEG ratio is 0.9. As such we think that value investors should take a closer look at Dollar Tree.
SouFun Holdings Limited (NYSE:SFUN), a $2.1 billion market cap Chinese Internet portal, was another of Robertson’s picks with the 13F disclosing ownership of over 600,000 shares. Business has been booming per SouFun’s quarterly reports, yet the stock has fairly modest earnings multiples (the forward P/E is only 9). We think that this is because of a variety of factors, including uncertain macro conditions in China and a rash of accounting fraud allegations which have driven investors away from a number of Chinese stocks.
The filing reported a new position of over 300,000 shares in Chicago Bridge & Iron Company N.V. (NYSE:CBI). The engineering and construction contractor is another growth stock, as in its most recent quarter sales were up 23% compared to the same period in the previous year, fueling a slightly larger increase in earnings. Chicago Bridge & Iron carries trailing and forward P/Es of 19 and 12, respectively, as Wall Street analysts are bullish on the company. We’d be interested in learning more to see if recent growth rates could continue.
Robertson’s high upside potential picks include a number of names that seem to have good value prospects. In many cases, there is a major caveat which will turn off a number of investors- falling margins for Apple, China for SouFun, mortgages for Ocwen- but if a value investor is prepared to look into the company and see if the opportunity is large enough to offset these issues we could see them adding any of these stocks to a value portfolio.
Disclosure: I own no shares of any stocks mentioned in this article.
