While the price-to-earnings multiple is a common value metric, one drawback is that it does not account for future earnings growth. A way to correct for this is to use the PEG ratio, which includes both the P/E multiple and analyst expectations for future growth, although in turn there is often a good deal of inaccuracy in analyst forecasts. We track quarterly 13F filings from hundreds of hedge funds such as billionaire Steve Cohen’s SAC Capital Advisors as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and also like to screen filings from top managers according to a number of criteria. Read on for our quick take on SAC’s five largest holdings from the end of March with five-year PEG ratios less than 1 (or see the full list of Cohen’s stock picks).
The fund more than doubled the size of its position in SM Energy Co. (NYSE:SM), a $4.1 billion market cap oil and gas exploration and production company focused on U.S. share plays, to a total of 3.1 million shares. While revenue grew by 30% in the first quarter of 2013 versus a year earlier, SM’s quarterly report showed a significant decline in net income over the same period. Still, Wall Street analysts expect earnings per share to grow in 2014 placing the current valuation at 16 times forward earnings estimates.
Cohen and his team included Michael Kors Holdings Ltd (NYSE:KORS) among their ten largest holdings by market value for the first quarter of 2013. The company’s fiscal year ended in March, with revenue up 57% in its Q4 versus a year earlier and net income more than doubling. The sell-side is expecting high enough earnings growth over the next several years that despite a trailing P/E of 30 Kors carries a five-year PEG ratio of 0.8. Billionaire Andreas Halvorsen’s Viking Global moved heavily into Michael Kors Holdings Ltd (NYSE:KORS) between January and March, closing the quarter with over 12 million shares (check out more stocks Viking Global was buying).
SAC disclosed ownership of 4.3 million shares of GNC Holdings Inc (NYSE:GNC) as of the beginning of April. At a market capitalization of $4.5 billion, the drug store carries trailing and forward P/E multiples of 19 and 14, respectively; analysts then expect further improvements on the bottom line resulting in a PEG ratio below 1. While recent results have been decent, a number of market players are bearish on GNC: the most recent data shows that 12% of the float is held short. Still, we think GNC could qualify for “growth at a reasonable price” status.