Price-to-earnings multiples shouldn’t be used as the sole criterion for making an investment decision- in particular, they give little to no weight to future growth in favor of either historical performance or of earnings in the near future which are easier to estimate. Still, P/E multiples are often used by value investors as part of their decision making process and by many other investors as part of an initial screen for good investing ideas. Here are five stocks which billionaire Louis Bacon’s Moore Global (see more of the fund’s stock picks) had over $10 million invested in at the end of the third quarter of 2012 (according to its 13F filing) and which have trailing and 2013 P/E multiples of 12 or lower:
One of the fund’s top picks was JPMorgan Chase & Co. (NYSE:JPM), reporting a position of 3.8 million shares. The bank trades at less than 10 times trailing earnings following a very good fourth quarter of 2012 that beat expectations, and sell-side expectations currently imply a P/E of 8 based on earnings for 2013. JPMorgan Chase also carries a small discount to book value; this gap used to be wider, however, before the stock’s 8% gain in the last month. Fellow billionaire Ken Fisher’s Fisher Asset Management owned over 13 million shares at the end of September after more than doubling the size of its position in Q3 (find more stocks Fisher was buying).
Moore also liked American International Group, Inc. (NYSE:AIG), buying 3.4 million shares of the insurer during the third quarter of the year. AIG trades at 10 times earnings estimates for 2013, and expectations of earnings growth over the next several years generate a five-year PEG ratio of 0.4. In addition, while we do think that AIG hasn’t quite earned our trust as a business and we would want to see it trading at something of a discount to book value, the current P/B ratio of 0.5 seems to low. AIG won a place as one of the most popular stocks among hedge funds in Q3 (see more of the most popular stocks).
Two more financials and one basic materials stock:
U.S. Bancorp (NYSE:USB) was another low-multiple stock (the trailing and 2013 P/Es are 12 and 10, respectively) in Bacon’s portfolio. His fund owned 3.1 million shares at the end of September. Warren Buffett’s Berkshire Hathaway is another fan of US Bancorp, with over $2 billion invested in the company (check out Warren Buffett’s stock picks). We would note that there is a high premium to book value here, though obviously the company is monetizing its assets very well and has been increasing both its revenue and its earnings.
Another financial in Moore’s portfolio was Wells Fargo & Company (NYSE:WFC). Like US Bancorp, Wells Fargo has a higher market capitalization than the book value the company has reported for its equity, but the gap is smaller here and Wells Fargo is known as a safer and more reliable bank. It too has fairly low earnings multiples- a trailing P/E of 10, for example- as a result of good financial performance. Buffett also likes Wells Fargo, and large hedge fund D.E. Shaw added shares in the third quarter as well (research more stocks D.E. Shaw likes). We think that it and JPMorgan Chase are both worth a closer look.
Vale SA (NYSE:VALE) recently declined in price partly due to a writedown, and this has left the stock at 9 times earnings whether we are looking at trailing results or analyst consensus for 2013. The company provides basic materials, including iron ore, in Brazil. Cliff Asness’s AQR Capital Management was another fund reporting a significant position in Vale at the end of September. We would be concerned about Vale’s recent financial performance and its exposure to commodity prices, even though the multiples are low.
Disclosure: I own no shares of any stocks mentioned in this article.
