Ken Heebner’s asset management firm Capital Growth Management is one of the hundreds of hedge funds and other notable investors we track in our database of quarterly 13F filings. We’ve found that 13Fs can be useful sources of investment information; the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and we think that other strategies are possible as well. Of course, investors can also screen individual managers’ picks according to various criteria, including the traditional value metric of low earnings multiples. Read on for our thoughts on Heebner’s five largest holdings in stocks with both trailing and forward P/Es of 14 or lower (or see the full list of the fund’s stock picks).
Capital Growth Management cut its stake in D.R. Horton, Inc. (NYSE:DHI) by 22% but the homebuilder was still one of its five largest holdings by market value at the end of March. The stock is valued at 14 times forward earnings estimates; revenue and net income have been up strongly, but analysts seem to be expecting something of a correction in business. With the housing market depending on the broader economy, D.R. Horton, Inc. (NYSE:DHI) carries a fairly high beta at 1.7. The most recent data shows that 14% of the float is held short.
Heebner and his team initiated a position of over 840,000 shares in Goldman Sachs Group, Inc. (NYSE:GS) between January and March. The investment bank is valued at a small premium to the book value of its equity, with a P/B ratio of 1.1. Goldman Sachs Group, Inc. (NYSE:GS) has done well at converting its assets into net income, however, and as a result it is in value territory with P/E multiples in the 11-12 range. Growth has been slow but the company does not need to improve by much in order to look like a buy. Cliff Asness’s AQR Capital Management was also buying Goldman Sachs Group, Inc. (NYSE:GS) last quarter (find Asness’s favorite stocks).
Rock-Tenn Company (NYSE:RKT) was another of Capital Growth’s cheap picks with the filing disclosing ownership of 1.3 million shares. The $7.3 billion market cap manufacturer of packaging products experienced a large percentage increase in net income in its most recent quarter compared to the same period in the previous fiscal year. Revenue was up only 2%, so high earnings growth is not sustainable, though with a trailing P/E of 13 it’s another potential value play. Sell-side forecasts imply a five-year PEG ratio of 0.9, so analysts expect EPS to rise a bit going forward.