The PEG ratio can be a useful metric for investors to screen for as it combines the traditional value criterion of a low P/E multiple with consensus forecasts for EPS growth from Wall Street analysts- even if analyst forecasts aren’t always correct, the lack of precision is arguably worth taking growth into account. As a result we consider the PEG ratio an estimate of a stock’s upside potential. We track quarterly 13F filings from hundreds of hedge funds including billionaire Louis Bacon’s Moore Global as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can also review managers’ top picks for stocks satisfying a number of criteria. Here is our quick take on the five largest positions in Moore’s portfolio with five-year PEG ratios of 0.9 or lower (or see the full list of stocks Bacon reported owning):
The fund’s largest single-stock holding by market value was its 5.2 million shares of Citigroup Inc (NYSE:C), where analyst expectations that the bank will improve over the next several years give it a PEG ratio of 0.9. The stock could also be considered cheap in terms of the book value of its equity, with the P/B ratio coming in at 0.8, and as such we’d be interested in comparing Citigroup Inc (NYSE:C) to other large banks which trade at similar levels. Our database shows Citigroup Inc (NYSE:C) as one of the five most popular stocks among hedge funds in the first quarter of 2013 (check out the full top ten list).
Fellow megabank Bank of America Corp (NYSE:BAC) was another of Moore Global’s high upside potential picks; the fund reported a position of over 10 million shares, while the PEG ratio here is well below 1. Recent results have not been strong, but a quick rebound is expected with analyst projections for 2014 implying a forward P/E of 10. There’s a substantial discount to book here as well, and Bank of America Corp (NYSE:BAC) has in fact been increasing its net income compared to a year ago. Billionaire Kerr Neilson’s Platinum Asset Management is another major shareholder of the bank (research more stocks Platinum owns).