Value investors often start by considering the P/E multiple as a measure of a stock’s “cheapness” and then evaluating the company’s potential to see if it is a good value. We track quarterly 13F filings from hundreds of hedge funds- primarily as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), but we also think that it can be useful to screen picks from top managers according to a number of criteria, including low earnings multiples. In this way investors can identify initial investment ideas worthy of further research. Read on for our quick take on billionaire Leon Cooperman’s Omega Advisors’s five largest positions as of the end of March in stocks with both trailing and forward P/Es of 13 or lower or see the full list of Cooperman’s stock picks.
The fund owned close to 15 million shares of SLM Corp (NASDAQ:SLM) at the end of the first quarter of 2013, making the education lender Omega’s second largest holding overall by market value. Sallie Mae’s stock price has climbed over 50% in the last year, and with the company’s revenue and earnings rising significantly as well the current market capitalization of $9.9 billion places the stock at 9 times earnings (whether we compare that valuation to trailing results or analyst expectations for 2014). Sallie Mae currently pays a dividend yield of 2.6%.
Cooperman and his team reported a position of a little over 4 million shares of XL Group plc (NYSE:XL), an $8.6 billion market cap insurance and reinsurance company. The stock is valued at something of a discount to the book value of its equity, with a P/B ratio of 0.8, and also looks like a potential value play in quantitative terms as far as the earnings multiples go. Last quarter XL’s revenue rose by 6% compared to the first quarter of 2012, with net income up as well, and we think that it’s worth considering.
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) was another of Cooperman’s picks with the filing disclosing ownership of 3.1 million shares. Freeport-McMoRan had plunged in December after the company announced the acquisition of two oil and gas companies; investors were likely worries about a lack of focus from management as well as integration risk. Omega had apparently started buying after that event, believing that the deal was actually a good thing. While we aren’t sure we agree with them, at a forward P/E of 7 we do think that it’s possible the market overreacted.
Omega increased its holdings of Capital One Financial Corp. (NYSE:COF) by 38% between January and March, to a total of 1.7 million shares. In the first quarter of 2013 reduced margins caused Capital One’s earnings to fall by over 20% versus a year earlier. Wall Street analysts believe that the company will rebound and earnings per share will rise in 2014, as can be seen by the fact that the stock carries trailing and forward P/Es of 11 and 9 respectively. We might hold off on Capital One for now, but would keep an eye out for further developments.
Cooperman had 1.6 million shares of UnitedHealth Group Inc. (NYSE:UNH) in his portfolio as of the beginning of April. Many health insurers are trading fairly cheaply, and UnitedHealth is no exception with trailing and forward earnings multiples in the 11-12 range. However, earnings have been down here as well despite rising revenue and we’d at least want to see stable net income numbers at that pricing. Billionaire David Shaw’s D.E. Shaw more than doubled its stake in UnitedHealth during Q1, closing March with 3.2 million shares according to its own 13F (find D.E. Shaw’s favorite stocks).
As a result we think that we’d avoid both Capital One Financial Corp. (NYSE:COF) and UnitedHealth Group Inc. (NYSE:UNH) until financial performance improves. We’ve mentioned that we are skeptical of Freeport-McMoRan’s acquisitions but the stock is certainly cheap and with a high dividend yield as well it may be worth looking into. XL Group also seems interesting, given its value metrics and the fact that net income has been up recently, and we’d be interested in learning more about the company.
Disclosure: I own no shares of any stocks mentioned in this article.
