Insurer American International Group, Inc. (NYSE:AIG) stands out for a PEG ratio of .43, which is a result of the market’s skepticism of the company- the stock trades at only half of book value, and at 10 times forward earnings estimates- and expectations of solid earnings growth over the next several years. Caxton increased its stake in AIG by over 300% last quarter to a total of 8.7 million shares, and similar optimism from other funds gave AIG a place as one of the most popular stocks among hedge funds (see the top ten most popular stocks). We like the stock at this price; it certainly should have some discount to book value, but we think that the market is giving it too much of one.
Kovner and his team also liked MetroPCS Communications Inc (NYSE:PCS), with 1.6 million shares in their portfolio at the end of September. Fellow billionaire John Paulson initiated a position in the wireless phone company during the third quarter, making it one of his ten favorite stocks (check out Paulson’s stock picks). Analyst consensus for 2013 implies a forward P/E of 13, and a PEG ratio of 0.7; however, revenue growth was light in the third quarter compared to the same period in 2011. It might not be as high a priority.
Caxton hadn’t owned any shares of General Motors Company (NYSE:GM) at the beginning of July, but over the next three months it bought 1.2 million shares of the stock. GM had also made the list of hedge funds’ favorite stocks. It was one of billionaire David Einhorn’s long stock picks in his presentation at the Value Investing Congress, and his Greenlight Capital reported a position of almost 22 million shares (find Einhorn’s favorite stocks). The automaker carries trailing and forward P/Es of 10 and 7, respectively, and the PEG ratio is 0.8 as analysts foresee a recovery in the auto market. We think a number of auto stocks are priced low enough to be worth considering, but GM might not be as good a buy as some competitors or auto parts companies.
The fund nearly tripled the size of its position in Citigroup Inc. (NYSE:C), which trades at 9 times forward earnings estimates and a PEG ratio of 0.9. Between that and a P/B ratio of 0.6 it does look cheap, but revenue dropped 36% and net income was down 88% in its most recent quarter compared to the third quarter of 2011. Of the megabanks, we think that we might prefer JPMorgan Chase & Co. (NYSE:JPM); in terms of P/B ratio it trades at a premium to Citi at roughly 90% of book value, but its forward P/E of 8 actually represents a very slight discount to Citi. In addition, JPMorgan Chase reported significant earnings growth last quarter versus a year earlier; while revenue was up only slightly, it seems to be in a much better position than Citigroup. Both of these banks were among hedge funds’ favorite stocks; they were also two of the top four stocks in our rankings of the ten financial stocks hedge funds love.
