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:
Sticking with emerging market search engines, Tiger Global increased its stake in Baidu.com, Inc. (NASDAQ:BIDU) by 45% during Q3 to a total of almost 2.2 million shares. William Gray’s Orbis Investment Management was another major investor in the Chinese company, with 3.2 million shares in its own portfolio (check out Orbis's stock picks). Baidu has been reporting high growth as well, as earnings were 60% higher in its most recent quarterly report than in the same period in 2011. The stock price has fallen 20% in the last year, possibly due to concerns over Chinese macro and accounting controls, but analyst expectations imply strong growth and a five-year PEG ratio of 0.7.
TAL Education Group (NYSE:XRS), a Chinese tutoring services company, was another emerging markets stock in the fund’s portfolio which boasts a low PEG ratio (0.6 in this case). Again, the Chinese association may be harming the valuation: growth has been high, but the stock is down 25% since a year ago and the trailing P/E is 19. While that is a bit high for a pure value stock, earnings growth is expected to continue here as well. We think that either of these Chinese stocks are worth researching though investors should note the concerns about the country and possibly adjust any position sizes accordingly.
Tiger Global initiated a position of 700,000 shares in Mellanox Technologies, Ltd. (NASDAQ:MLNX), a $2.3 billion market cap semiconductor company. Renaissance Technologies, founded by billionaire Jim Simons, was also buying the stock in the third quarter of 2012 (find Renaissance's favorite stocks). The trailing and forward P/Es here are 21 and 15, respectively, with Wall Street analysts expecting continued high growth (though almost certainly at a slower rate than what the company has been experiencing recently).
Disclosure: I own no shares of any stocks mentioned in this article.