In May, Capital Growth Management, managed by Ken Heebner, filed its 13F for the first quarter of 2013 with the SEC. Even with the inherent delay which comes with 13F filings, we’ve found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and we think that more strategies are possible as well. Another common use of these filings is to screen them according to a variety of investment criteria- not to blindly imitate top investors, but to further refine their initial investment ideas. The PEG ratio takes into account both the P/E multiple and analyst expectations of future earnings growth rates. While analyst forecasts are often inaccurate, this is at least one way to account for both a stock’s growth prospects and value status. Here are Capital Growth’s five largest holdings as of the end of March in stocks with five-year PEG ratios less than 1 (or see the full list of Heebner's stock picks).
Leading our list is the asset management firm’s largest holding at the end of Q1, Citigroup Inc (NYSE:C). Citigroup Inc (NYSE:C), as it happens, was one of hedge funds’ ten favorite stocks during the quarter (check out our full top ten list). Analyst expectations for next year imply a forward earnings multiple of 9, with continued improvements on the bottom line beyond that points resulting in a PEG ratio of 0.9. Citi also should be noted for trading at a discount to the book value of its equity, and in fact its earnings have been up strongly going by recent reports.
Heebner and his team reported a position of 1.8 million shares in Whirlpool Corporation (NYSE:WHR). The household appliance company has more than doubled in price in the last year, with many investors seeing it as a way to play a rising housing market. The sell-side agrees, with a PEG ratio of only 0.5. With earnings more than doubling in the first quarter of 2013 versus a year earlier (though we’d note this came entirely through higher margins), the trailing P/E is 18 which would certainly be an attractive valuation if we were confident high growth would continue.
Capital Growth Management cut its stake in Delta Air Lines, Inc. (NYSE:DAL) by 34% but still owned 7.3 million shares at the beginning of April. Airlines have done well over the last year as bulls have hoped that the merger of US Airways and American, by reducing competition, will increase companies’ pricing power. Still, a general unease among investors for getting into the traditionally prone to bankruptcy industry has left valuations arguably in value territory. Consensus forecasts for 2014 imply a forward earnings multiple of only 6.