We use our database of 13F filings from hedge funds and other notable investors for a variety of purposes. The information in 13Fs can be used to help develop investment strategies; we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year and we think that more techniques are possible as well. Of course, many investors treat ownership by a particular investor similarly to a stock screen, using it as a list of recommendations and then doing more research on any names which seem interesting. We can also combine ownership with other criteria, including a low PEG ratio (a value metric which takes into account both the P/E multiple and the analyst consensus growth rate). Here are five stocks which billionaire Julian Robertson owned at the end of December with low five-year PEG ratios (or see the full list of Robertson’s stock picks):
One of Robertson’s largest holdings by market value was his approximately 680,000 shares of Ocwen Financial Corp (NYSE:OCN), which originates and services mortgage loans. With the real estate market expected to improve over the next several years, the sell-side is expecting high earnings growth for the company. Revenue increased 51% in the fourth quarter of 2012 versus a year earlier, so Ocwen is at least moving in the right direction. Analyst consensus implies a forward P/E of only 7, and while the company is in a risky business we think it is worth further research.
The legendary investor cut his stake in Apple Inc. (NASDAQ:AAPL) but this still left the consumer technology company as one of his five largest holdings as of the end of 2012. With a number of other filers in our database selling out of Apple Inc. (NASDAQ:AAPL) completely, it lost its place as the most popular stock among hedge funds to AIG. The sell-side remains fairly optimistic on Apple Inc. (NASDAQ:AAPL)’s growth prospects, and given the trailing P/E of 10 this results in a low PEG ratio giving the company quite a bit of room to underperform expectations and still be fairly valued.
In the fourth quarter of 2012, Robertson initiated a position of almost 390,000 shares in Dollar Tree, Inc. (NASDAQ:DLTR). The dollar store experienced double-digit growth rates on both top and bottom lines last quarter compared to the fourth quarter of 2011, and at a trailing earnings multiple of 17 it is only somewhat more expensive than big-box discount retailers. With growth expected to continue, the five-year PEG ratio is 0.9. As such we think that value investors should take a closer look at Dollar Tree.