Billionaire Dan Loeb’s Cheap Stock Picks
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Billionaire Dan Loeb is best known for his activist investing, but his fund Third Point simply manages too much capital to be purely focused on activist crusades like Loeb’s recent replacement of Yahoo’s CEO. For example, Third Point’s recent 13F revealed a number of stocks in the fund’s portfolio that are priced very low in terms of their trailing earnings. Naturally, many of these stocks trade at low earnings multiples because they are out of favor with the market or aren’t seen to have good business prospects. And of course investors can’t buy every cheap stock that any of a large number of billionaire investors likes. Still, we think that they make a good starting point for further review. Here are five stocks that Third Point owned at the end of September (see the full list of stocks from their 13F filing) with trailing and forward P/E multiples of 10 or lower:
Loeb and his team had initiated a position of 2.3 million shares in American International Group (NYSE: AIG) during the second quarter, and between July and September they increased their stake further to a total of 23.5 million shares. AIG was a hot stock in the hedge fund community during the quarter: It grabbed the #3 spot on our list of the most popular stocks among hedge funds (see the full rankings) despite not even being in the top ten at the end of June. Trading at about half the book value of its equity, and at 10 times analyst consensus for 2013, we think that it is a value stock and has plenty of room to rise in price even if it slightly underperforms expectations.
Delphi Automotive PLC (NYSE: DLPH) was another low-multiple stock in Third Point’s portfolio. The $11 billion auto parts company, whose products include electrical, powertrain, and safety systems, carries trailing and forward P/E multiples of 9 and 8, respectively. The entire auto ecosystem, including the carmakers themselves as well as auto parts suppliers, is trading cheaply as the market expects weak macro going forward, particularly in Europe. With Delphi reporting flat earnings in the third quarter compared to the same period in 2011, it seems to be doing fine for now and so it might be a good value.
Third Point owned 2 million shares of UnitedHealth Group Inc. (NYSE: UNH), which recently joined the Dow Jones Industrial Average to represent the health insurance industry. In addition to trading at 10 times earnings, UnitedHealth can boast a fairly low correlation with the broader market (its beta is 0.5) and good growth last quarter (its earnings, for example, rose 23% versus a year earlier). The biggest concern in our minds is uncertainty regarding future regulation of the insurance industry and the health care sector more generally, but UnitedHealth is certainly worth considering as a value stock.
WellPoint, Inc. (NYSE: WLP), where Loeb increased his stake 47% to nearly 1.3 million shares is an even cheaper health insurer; it trades at 7 times earnings, whether we consider its historical results in the last four quarters or analyst estimates for next year. However, its business has been about flat and the stock price has fallen 22% in the last year, as the market has perceived it to be underperforming its peers. Again, we’d be very interested in looking more closely at the company, though we’re not sure we’d call it a better buy than the fast-growing UnitedHealth.
Another health insurer that Third Point owned was CIGNA Corporation (NYSE: CI), which billionaire David Einhorn of Greenlight Capital had recommended as one of his long picks at the Value Investing Congress in October (check out why Einhorn liked Cigna). Like the other health insurers, Cigna would normally be considered a value stock at 10 times trailing earnings, and with the company expected to grow its business further in 2013, the forward P/E is only 8. Those growth projections are partly derived from a recent acquisition, suggesting that the company won’t need much organic growth to hit the target. We have quite a bit of respect for Einhorn as well as Loeb and with the stock looking cheap we’d be leaning toward Cigna at the moment, though any of the insurers could prove a good value barring extremely punishing regulations.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!