Value investors like to use price-to-earnings multiples as a crude shortcut to determine how a stock’s valuation compares to the company’s earnings. Of course, this metric doesn’t account for a stock’s growth potential; one way to do this is to use the PEG ratio, which places the P/E multiple in the context of the future growth rate expected by sell-side analysts. Obviously, the PEG ratio is highly dependent on analyst estimates, and these are not always correct. We still think that it is worth considering stocks with low PEG, as long as investors are aware that the estimates might be accurate and only buy the stock if they do believe in its upside. Here are five stocks with low PEG ratios and which billionaire Dan Loeb’s Third Point had at least $50 million invested in according to its 13F for the third quarter of 2012 (see the full list of stocks from Third Point’s 13F):
Loeb moved heavily into American International Group, Inc. (NYSE:AIG), owning about 24 million shares at the end of the quarter. This made it his second largest position by market value behind Yahoo! Inc. (NASDAQ:YHOO), where Third Point has played a leading activist role. AIG made our list of the most popular stocks among hedge funds for the third quarter of the year (see the full rankings). It’s easy to see a value case here with the company carrying a forward P/E of 10, and trading at only half the book value of its equity; further optimism from the Street implies a PEG ratio of 0.4.
$8.5 billion market cap oil and gas equipment and services company Weatherford International Ltd (NYSE:WFT) was another stock in Third Point’s portfolio, with the fund reporting a position of 4 million shares. Weatherford’s stock price is down 22% in the last year, and net income came in 63% last quarter than a year earlier. The PEG ratio of 0.5 suggests that analysts expect a strong rebound in the company’s numbers. Orbis Investment Management, which is managed by William Gray, owned 44 million shares at the end of September (check out Gray’s stock picks).