We analyze hedge fund filings for investment ideas and for their potential in formulating market-beating investment strategies. For example, in our August newsletter we published a list of the most popular small cap stocks among hedge funds and that portfolio went on to deliver an excess return of 16 percentage points between September and January (read more about our hedge fund investing strategies). We can also use lists of stocks that hedge funds like as recommendations for further research, particularly if we screen them further. The PEG ratio places the P/E multiple, a traditional value metric, in the context of expected earnings growth rates and can therefore serve as a measure of upside potential if the company does in fact hit its earnings targets. Here are five stocks which Tiger Global Management, a Tiger Cub hedge fund (see the full list of Tiger Global’s stock picks) reported owning in its most recent 13F filing which have low PEG ratios:
Tiger Global owned 1.3 million shares of Apple Inc. (NASDAQ:AAPL) at the end of September. The drop in Apple Inc. (NASDAQ:AAPL)’s stock price over the last few months, including a plunge following its quarterly report, has left it at 10 times trailing earnings. The sell-side has been reducing its targets for the company but still expects moderately high earnings growth rates, and as a result the forward P/E is 9 and the five-year PEG ratio is 0.7. We would place ourselves between analyst consensus and current market sentiment: analyst expectations are too high, but the company will likely grow its earnings enough to prove undervalued. Apple Inc. (NASDAQ:AAPL) was the most popular stock among hedge funds for the third quarter of 2012 (see the top ten rankings).
The fund also had a large position in Yandex NV (NASDAQ:YNDX), a Russian search engine and Web portal. Yandex trades at 34 times trailing earnings, but in the third quarter of 2012 the company reported very high growth rates that- if sustained- could turn out to justify this high valuation. Specifically, revenue was up 41% versus a year earlier and with only a slight shrinking of margins net income increased 34%. Tiger Global reported owning almost 24 million shares of the stock in its 13F.
Three more high upside potential stocks that Tiger Global likes, including another search engine: