By using data from hedge funds’ 13F filings, we have found that on average the most popular small cap stocks among hedge funds beat the market by 18 percentage points per year. Learn more about our small cap strategy. It’s also possible to think of each individual 13F as a list of recommendations from that manager which an investor can refine, doing more research on companies which seem like they have good prospects. Seth Klarman of the Baupost Group is a well-known value investor; copies of his investing book Margin of Safety have sold for up to $1,400. Here are four stocks which Baupost reported owning on its 13F (see the full list of Klarman’s stock picks) and which currently have both trailing and forward price-to-earnings multiples of 18 or lower:
Baupost owned almost 11 million shares of BP plc (NYSE:BP), making it the fund’s largest holding by market value. Oil majors are generally trading at earnings multiples of around 10, and BP is no exception; in fact, its forward P/E is only 8, and we think that is at least in part because its brand remains tarnished by the Deepwater Horizon disaster. We think that BP- which has been very active in selling off assets- has at least some value prospects (and a quite high dividend yield) though with other oil majors being cheap it might be better to look at Exxon Mobil Corporation (NYSE:XOM) and other peers. The Bill and Melinda Gates Foundation Trust is another major shareholder of BP (check out more stocks the trust is invested in).
Klarman and his team had a large stake in News Corp (NASDAQ:NWSA). Many value investors like News Corp, and it was actually the most popular consumer services stock among hedge funds at the end of December. Its earnings multiples are not particularly high as is compared to other media companies, and the company plans to break into two. It is known that spinouts often increase shareholder value since management no longer has to concern itself with the parent company’s operations (read more about investing in spinouts) and in theory the breakup of News Corp creates a similar situation. The stock price has risen 50% in the last year, so some potential improvement has already been accounted for.
The fund reported a position of 15 million shares in Genworth Financial Inc (NYSE:GNW), a $4.5 billion market cap insurance and wealth management company. Wall Street analysts are very bullish on Genworth, with their consensus for 2014 implying a forward P/E of only 6; even on a trailing basis the earnings multiple is a reasonable 14. The EV/EBITDA multiple is similarly low, at 4.9x going by trailing figures. The company did report high earnings growth last quarter compared to the fourth quarter of 2011, though revenue was actually down slightly. Billionaire Eddie Lampert’s ESL Investments owned over 12 million shares at the end of December (check out more stocks the fund owns).
Disclosure: I own no shares of any stocks mentioned in this article.
