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.
The Goodyear Tire & Rubber Company (NYSE:GT) was another of Appaloosa’s stock picks. The trailing earnings multiple is not particularly low here, but analysts are likely expecting that an improvement in conditions for the auto industry will benefit Goodyear: the stock’s beta is 2.1. The company is highly levered and there have been concerns about its pension funding, so good times may be more crucial here than at the automakers themselves. Billionaire Steve Cohen’s SAC Capital Advisors was adding shares between October and December and closed 2012 with 6.9 million shares in its portfolio (find Cohen’s favorite stocks).
The fund included US Airways as well as United Continental in its bullish take on the airline industry, with the filing disclosing ownership of over 12 million shares of the former company. US Airways does have to contend with the integration risk as well as the potential benefits of consolidation (and the common claim that the combined company will be able to realize synergies) and does carry low P/Es on both a trailing and a forward basis. Billionaire Stanley Druckenmiller initiated a position of 4 million shares in US Airways during the fourth quarter (check out more stocks Druckenmiller was buying).
Tepper and his team were among the many value investors with a stake in General Motors Company (NYSE:GM). Greenlight Capital’s billionaire manager David Einhorn has been optimistic about GM’s prospects in both Europe and the U.S. as well as in developing markets, and the fund had GM as one of its top picks at the beginning of January (research more stocks Einhorn likes). Currently GM trades at 10 times trailing earnings, indicating that the market expects the company to struggle for quite some time. Analyst expectations imply a forward P/E of 7 and a five-year PEG ratio of 0.5.
Disclosure: I own no shares of any stocks mentioned in this article.
