We can screen stocks for “upside potential” through the PEG ratio, which takes into account both a stock’s price-to-earnings multiple and analyst expectations for future growth (we emphasize that this is only a measure of upside potential because analyst forecasts aren’t always correct, though they are at least one way to take growth into account). Since we track 13F filings from hundreds of hedge funds as part o our work researching investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), we can also look through individual managers’ filings for ideas with high upside potential which investors may want to research further. Here are five picks from Tiger Cub John Griffin’s Blue Ridge Capital’s 13F for the first quarter of 2013 which feature five-year PEG ratios less than 1 (or see the full list of the fund’s stock picks).
Blue Ridge trimmed its stake in American International Group Inc (NYSE:AIG) by 17% in Q1, but still closed March with 8.7 million shares in its portfolio. AIG lost its place as the most popular stock among hedge funds to Apple between January and March, but remained in the top three (check out the full top ten list). The insurer has outperformed the market over the last year but is still valued at a significant discount to book with a P/B ratio of 0.7, and given analyst expectations for the next several years its PEG ratio is just below 1.
Griffin and his team kept their holdings of Liberty Global PLC (NASDAQ:LBTYA) about constant through the quarter at 3.9 million shares. The TV, Internet, and phone company (which mostly operates in Europe and Chile) is expensive in terms of its trailing earnings (as well as its trailing EBITDA, if we consider its enterprise value as well) but the sell-side is optimistic about the future. Revenue rose by 9% in its last quarterly report compared to the first quarter of 2012. The most recent data shows that 14% of the float is held short.