David Shaw founded large hedge fund D.E. Shaw in 1988 and the fund’s success since inception has made him a billionaire. Last month the fund filed its 13F with the SEC, disclosing many of its long positions in U.S. stocks. We track 13Fs for a variety of purposes, including our research on investment strategies (we have discovered, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), but can also use them to see what funds including D.E. Shaw own (check out D.E. Shaw’s stock picks). We can also pick out the fund’s largest holdings in a number of categories, including stocks with low price-to-earnings multiples, so that investors can do any research on interesting names. Here are D.E. Shaw’s five largest positions in stocks with both trailing and forward P/Es of 15 or lower:
The fund reported a position of 1.5 million shares in Apple Inc. (NASDAQ:AAPL), and at 10 times its trailing earnings the consumer technology company certainly qualifies for having a low multiple. Wall Street analysts continue to be optimistic about Apple but the stock has fallen dramatically in the last few months as the market expects lower gross margins to fuel a decline in the company’s earnings. While a number of hedge funds still owned Apple Inc. (NASDAQ:AAPL) at the end of December, enough had sold out of their position that it was no longer the most popular stock among hedge funds (AIG is the new #1).
D.E. Shaw owned 2.3 million shares of International Business Machines Corp. (NYSE:IBM) at the end of December. International Business Machines Corp. (NYSE:IBM) managed to squeeze out a 6% earnings growth rate last quarter compared to the fourth quarter of 2011 despite a very small decline in revenue, though we doubt that the company will be able to continue growing the bottom line through higher margins alone. The sell-side has a different take, judging by the fact that the stock trades at 15 times trailing earnings but only 11 times forward earnings estimates. As a result we would avoid the stock unless it started to show more sustainable performance.
Wells Fargo & Co (NYSE:WFC) was another of the fund’s top picks with the 13F disclosing ownership of 9.8 million shares. In terms of the book value of its equity, it’s tough to call Wells Fargo & Co (NYSE:WFC) a value stock: the P/B ratio is 1.3. However, because the bank generates income from these assets more efficiently than its peers, on an earnings basis it is quite competitive with other large banks with (for example) a forward P/E of 9. The business has been doing well, the dividend yield is a little under 3%, and overall we think that it may be one of the better buys in financials. We would at least compare it to JPMorgan Chase however.