We track 13F filings from hedge funds and other notable investors as part of our work developing investment strategies; for example, the most popular small cap stocks among hedge funds earn an excess return of 18 percentage points per year (learn more about our small cap strategy). We think it’s possible to find other strategies as well. Of course, 13Fs from top managers such as billionaire David Tepper of Appaloosa Management can also be mined for potential ideas in a similar way to how many investors use stock screens. We can also go deeper and use the PEG ratio based on earnings expectations from Wall Street analysts as a way to measure a stock’s potential upside if those forecasts are correct, and then search Tepper’s picks for potentially promising stocks. Here are five stocks with low PEG ratios that Appaloosa owned at the end of December (or see the full list of Tepper’s stock picks):
During a quarter when many hedge funds were selling Apple Inc. (NASDAQ:AAPL)– enough, in fact, that it lost its place as the most popular stock among hedge funds according to our analysis- Appaloosa actually increased its holdings by 75%. The PEG ratio is 0.5 as the earnings multiple is low and the sell-side is expecting considerable growth, but Apple Inc. (NASDAQ:AAPL)’s stock price has fallen dramatically in the last few months as the market prices in an expectation that falling margins are beginning to offset revenue growth and resulting in lower earnings. In response Apple Inc. (NASDAQ:AAPL) may begin to return more cash to shareholders.
Tepper has been a fan of airlines, and even after a small sale of United Continental Holdings Inc (NYSE:UAL) his fund owned 9.1 million shares of the stock. The industry is a notorious money loser, though some value investors are pointing to the impending purchase of American Airlines by US Airways Group, Inc. (NYSE:LCC) as a catalyst in consolidating the industry and pushing up prices. United Continental’s forward P/E is only 7 so any earnings growth at all would leave the stock well positioned. GMT Capital, managed by Thomas Claugus, was another bull on United Continental with a position of over 10 million shares.