Value investors often begin their search for attractive stocks by looking for those which are “cheap” in terms of having low price-to-earnings multiples. We maintain a database of quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies (for example, we’ve discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can also screen picks from individual managers in search of potential value opportunities which investors might want to research further. Here are our brief thoughts on the five largest positions in billionaire David Harding’s Winton Capital Management’s portfolio in stocks with both trailing and forward P/Es of 12 or lower (or see the full list of Harding’s stock picks):
The fund increased the size of its position in Northrop Grumman Corporation (NYSE:NOC) to a little more than 600,000 shares during the first quarter of 2013. In the first quarter of 2013, revenue and earnings were down slightly versus a year earlier; it’s been suggested that cuts in U.S. military spending may harm aerospace and defense companies such as Northrop Grumman, at least temporarily. With investors not particularly optimistic about the industry, there are a number of cheap stocks available and Northrop Grumman is no exception with a valuation of 11 times forward earnings estimates.
Harding and his team were also buying Raytheon Company (NYSE:RTN) between January and March. Similarly to Northrop Grumman, recent reports show a small fall in revenue at the company; however, at least so far Raytheon has been able to drive something of an increase in earnings due to higher net margins. It is priced at similar levels to other defense contractors, with trailing and forward P/Es of 11 and 12 respectively, and also offers a dividend yield of a little over 3%. The beta is 0.6, as aerospace and defense companies generally have little exposure to the overall economy.
Another contractor among Winton’s picks is Lockheed Martin Corporation (NYSE:LMT); the filing disclosed ownership of about 370,000 shares of that stock. The dividend yield of 4.2% and the fairly low beta make Lockheed Martin an interesting target for income or defensive investors, as over the long term we’d expect these businesses to be fairly stable. With decent earnings multiples as well and only a slim decline in the company’s sales in Q1 from its levels a year ago, we think it’s worth considering on those grounds as well as being a potential value play.