There are several ways for retail investors to use the information in quarterly 13F filings from hedge funds for their own gain. For one, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (read more about imitating small cap picks) and we think more strategies are possible as well. Another technique is to look at top picks of different managers- not to imitate them, but to use their ideas similarly to a stock screen as a list of free ideas. We can also combine hedge fund ownership with other criteria such as low price-to-earnings multiples. Read on for our brief thoughts on five stocks that Cliff Asness’s AQR Capital Management owned at the beginning of January with both trailing and forward P/Es of 10 or lower or see the full list of Asness’s stock picks.
The fund’s top pick was Apple Inc. (NASDAQ:AAPL); even with many hedge funds selling the stock, causing Apple Inc. (NASDAQ:AAPL) to lose its place as the most popular stock among hedge funds during Q4 (see which stock was the new #1), AQR actually added a small number of shares and had about 520,000 shares at the end of 2012. Apple Inc. (NASDAQ:AAPL) experienced flat earnings in its most recent quarter compared to the same period in the previous year (with one fewer week in the quarter) and currently trades at 10 times trailing earnings as the market expects a decline in net income.
AQR reported owning 4.4 million shares of JPMorgan Chase & Co. (NYSE:JPM) at the end of the fourth quarter of 2012. In terms of the book value of its equity, JPMorgan Chase is essentially fairly valued with a P/B ratio just below 1. The earnings multiples are also low despite the fact that the bank has been reporting large increases in revenue and earnings (and has the London Whale incident to contend with in its trailing numbers). Banks in general look cheap and we’d be interested in comparing JPMorgan Chase to peers such as Wells Fargo.
Asness and his team cut their stake in Chevron Corporation (NYSE:CVX) by 10% but the oil major was still one of their top stock picks. Chevron carries trailing and forward P/Es of 9 and 10, respectively, as large energy companies- like large banks- are generally trading at low earnings multiples. As with JPMorgan Chase, it’s of course possible that some of Chevron’s peers are better buys, even those which are slightly more expensive on an earnings basis. The stock pays a dividend yield of 3%, lower than BP’s but competitive with many similar companies.
See two more of Asness’s picks with low earnings multiples: