AQR Capital's Cheap Stock Picks Include Apple

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There are several ways for retail investors to use the information in quarterly 13F filings from hedge funds for their own gain. For one, we at Insider Monkey have found that the most popular small-cap stocks among hedge funds earn an average excess return of 18 percentage points per year and we think more strategies are possible as well.

Another technique is to look at top picks of different managers- not to imitate them, but to use their ideas similarly to a stock screen as a list of free ideas. We can also combine hedge fund ownership with other criteria, such as low price-to-earnings multiples. Read on for our brief thoughts on five stocks that Cliff Asness of AQR Capital Management owned at the beginning of January with both trailing and forward P/Es of 10 or lower, or see the full list of Asness's stock picks.

The fund’s top pick was Apple (NASDAQ: AAPL); even with many hedge funds selling the stock, causing Apple to lose its place as the most popular stock among hedge funds during Q4.

AQR actually added a small number of shares, and had about 520,000 shares at the end of 2012. Apple experienced flat earnings in its most recent quarter compared to the same period in the previous year (with one less week in the quarter) and currently trades at 10 times trailing earnings as the market expects a decline in net income.

AQR reported owning 4.4 million shares of JPMorgan Chase (NYSE: JPM) at the end of the fourth quarter of 2012. In terms of the book value of its equity, JPMorgan Chase is essentially fairly valued with a P/B ratio just below 1. The earnings multiples are also low despite the fact that the bank has been reporting large increases in revenue and earnings (and has the London Whale incident to contend with in its trailing numbers). Banks in general look cheap and we’d be interested in comparing JPMorgan Chase to peers, such as Wells Fargo.

Asness and his team cut their stake in Chevron (NYSE: CVX) by 10%, but the oil major was still one of the hedge fund's top stock picks. Chevron carries trailing and forward P/Es of 9 and 10, respectively, as large energy companies- like large banks- are generally trading at low earnings multiples.

As with JPMorgan Chase, it’s of course possible that some of Chevron’s peers are better buys, even those which are slightly more expensive on an earnings basis. The stock pays a dividend yield of 3%, lower than BP’s but competitive with many similar companies.

The 13F disclosed that the fund had increased its holdings of CF Industries  (NYSE: CF), a $12 billion market cap fertilizer company, by 70% to a total of about 570,000 shares. In the fourth quarter of 2012, CF’s net income increased versus a year earlier despite a 14% decline in revenue; that's impressive, though we're cautious on whether earnings growth can be sustained. Analyst consensus implies a forward P/E of 8. Over the longer term, CF may benefit from increased agriculture demand.

Northrop Grumman (NYSE: NOC) rounds out our list of cheap stocks that AQR owned at the end of 2012. The aerospace-and-defense company would be expected to see a decline in business as a result of cuts to U.S. military spending, though it’s possible that it would be able to cut costs, as well.

Northrop Grumman trades at 9 times earnings, whether we consider trailing results or projections for 2014, and this is in line with the multiples of its industry peers. There is a significant dividend yield here as well, at 3.2%, though we’d note that Lockheed Martin’s yield is 5%.

Overall, these cheap stocks all look worthy of at least some further research. Northrop Grumman and Apple are trading at low multiples due to concerns about their developing business conditions- and in the case of Apple in particular we aren’t quite ready to write off the days of earnings growth.

JPMorgan Chase and Chevron are certainly good value prospects, though we aren’t sure they're better than their peers (we’d note that ExxonMobil and Wells Fargo are two more of AQR’s largest holdings, but are just outside the valuation criteria we set.) CF is also worth looking into, though with that company we would want to be thinking longer-term and of course reviewing its peers as well.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool recommends Apple and Chevron. The Motley Fool owns shares of Apple, CF Industries Holdings, JPMorgan Chase & Co., and Northrop Grumman. 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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