Billionaire David Shaw’s Cheap Stock Picks

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We track quarterly 13F filings from hundreds of hedge funds and other notable investors, including billionaire David Shaw’s large hedge fund D.E. Shaw. While one way to make use of this information is to compile 13Fs and use them to develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), we also like to screen managers’ top picks according to a number of criteria, including stocks whose valuations represent low multiples of their earnings. Read on for our thoughts on D.E. Shaw’s five largest holdings as of the end of March in stocks with both trailing and forward P/Es of 13 or lower, or see the full list of D.E. Shaw's stock picks.

While many hedge funds have been selling Apple (NASDAQ: AAPL) since the beginning of the year, D.E. Shaw increased its own holdings during Q1 to a total of 1.7 million shares. Apple actually regained its place as the most popular stock among hedge funds during the quarter (find more of hedge funds' favorite stocks). Lower gross margins have pulled the company’s earnings down, and markets are valuing Apple as if they expect that trend to continue: even with the company’s large cash hoard and plans to begin a large repurchasing program, the trailing P/E is 11.

The fund reported a position of 8.7 million shares in Wells Fargo (NYSE: WFC) at the end of the first quarter of 2013. While many large banks have crushed the market’s performance over the last year, Wells Fargo has outperformed the S&P 500 only slightly. With net income up 25% last quarter compared to the first quarter of 2012, the bank trades at 11 times trailing earnings and also offers a 3% dividend yield. Even with the stock valued at a considerable premium to the book value of the equity, there may be a value case here.

Shaw and his team disclosed ownership of 3.1 million shares of Marathon Petroleum (NYSE: MPC) a fairly recent spin-off of Marathon Oil’s downstream operations. Oil and gas refining and marketing companies are seeing very low earnings multiples in the current market, and Marathon is no exception, with both its trailing and forward P/Es clocking in at 8. With Wall Street analysts expecting business to grow over the next several years, the five-year PEG ratio is 0.7; we think Marathon and its peers are well worth considering as potential value plays.

D.E. Shaw increased its stake in ExxonMobil (NYSE: XOM) by 28% to a total of 2.7 million shares. Oil majors are also generally trading at least close to value territory, and ExxonMobil happens to be valued at 11 times forward earnings estimates. Earnings were about flat in the first quarter of 2013 versus a year earlier, though the company’s revenue fell by over 10% over the same time frame. We’re interested in oil majors, but with many of ExxonMobil’s peers also priced cheaply it would be worthwhile to see if their financial performance is any better.

Pfizer (NYSE: PFE) rounds out our list of D.E. Shaw’s cheap stock picks- the pharmaceutical company carries trailing and forward P/Es of 13 and 12, respectively, with the filing showing 6.8 million shares in the fund’s portfolio at the beginning of April. As with many pharmaceutical companies, Pfizer pays a high dividend yield of 3.5%, and with a beta considerably less than 1 might also be an attractive stock for income or defensive investors. We would note, however, that revenue was down in its most recent quarter compared to the same period in the previous year.

As a result, we think that we would avoid Pfizer at least for the time being. Apple is certainly cheap in terms of valuation metrics, and would be poised for big gains if the company can halt its decline, but it might be best to wait for further results there as well. We’ve mentioned that ExxonMobil might not be as interesting as the company’s peers, and while Wells Fargo and Marathon are certainly of interest we’re aware that those stocks’ industries are also generally cheap, so similar companies might be worth considering as well.

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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 Wells Fargo. The Motley Fool owns shares of Apple 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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