Billionaire Louis Bacon’s Cheap Stock Picks

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We track 13F filings from hedge funds and other notable investors for a number of reasons. For one, we work on researching investment strategies based on the included information: even with the inherent delay that comes from using 13F filings, the most popular small cap stocks among hedge funds generate an excess return of 18 percentage points per year on average (read more about imitating hedge funds' small cap picks), and we think other strategies are possible as well. A second way to use 13Fs is similarly to a stock screen: simply pull a top investor’s 13F and see which stocks are their top picks. We can also combine ownership with quantitative metrics, including P/E multiples, to further narrow a list of recommendations for future research. Here are five stocks which billionaire Louis Bacon’s Moore Global (see Bacon's stock picks) owned at the end of December, and which have both trailing and forward P/E's less than 12:

The fund’s top pick in this valuation category was JPMorgan Chase (NYSE: JPM) with a position of 5.1 million shares. JPMorgan Chase was one of the most popular financial stocks among hedge funds in the fourth quarter of 2012 (find more financial stocks hedge funds loved). It does look like a good value in earnings terms, with a trailing P/E of 10; in addition, the stock is priced almost exactly at the book value of its equity. JPMorgan Chase’s business has also been doing quite well, with revenue up 19% and earnings up 53% in its most recent quarter compared to the same period in the previous year.

Another big bank Moore liked was Wells Fargo (NYSE: WFC). Wells Fargo is, of course, Warren Buffett’s favorite financial stock, with Berkshire Hathaway owning $15 billion worth of the stock at the end of December (check out Buffett's favorite stocks). In earnings terms, the bank is priced at a small premium to JPMorgan Chase with (for example) a trailing earnings multiple of 11. This is due to a better return on assets, since Wells Fargo’s P/B ratio is well above parity at 1.3. With its safer reputation and better income-statement performance, it might be worth this book premium to other banks.

Discover Financial Services (NYSE: DFS) was another of Bacon’s stock picks; he and his team initiated a position of about 740,000 shares. Discover trades at 9 times both its trailing earnings and analyst consensus for the fiscal year ending in November 2014, and with its most recent quarter showing increases in revenue and earnings versus a year earlier we think it’s well worth considering as a value stock. Billionaire Ken Griffin’s Citadel Investment Group was buying shares of Discover last quarter, increasing its holdings to 5.2 million shares.

Moore Global was also buying shares of Regions Financial (NYSE: RF), a regional bank based in the southeastern U.S. Regions carries a significant discount to book value with a price-to-book ratio of 0.8, and its earnings multiples are comparable to the large banks we discussed earlier. In the fourth quarter of 2012, its revenue was up 30% from its levels in Q4 2011. Carlson Capital, managed by Clint Carlson, bought 9.4 million shares of Regions after not having owned any shares at the end of September. We think that the company looks like a good value prospect and would be interested in doing further research.

SunTrust Banks (NYSE: STI) rounds out our list of cheap stock picks from Bacon. The stock trades at 10 times forward earnings estimates, as recent numbers seem to have been pulled higher by abnormal earnings. SunTrust also has a P/B ratio of 0.8, and analyst expectations are high enough that the stock’s five-year PEG ratio is 0.7. We would note that billionaire George Soros sold 62% of his shares in SunTrust during the fourth quarter, though even at the end of 2012 he still owned 1.5 million shares.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. InsiderMonkey has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo. 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!

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