Ken Heebner’s High Upside Potential 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.
In May, Capital Growth Management, managed by Ken Heebner, filed its 13F for the first quarter of 2013 with the SEC. Even with the inherent delay which comes with 13F filings, we’ve 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 that more strategies are possible as well.
Another common use of these filings is to screen them according to a variety of investment criteria -- not to blindly imitate top investors, but to further refine their initial investment ideas. The PEG ratio takes into account both the P/E multiple and analyst expectations of future earnings growth rates. While analyst forecasts might be inaccurate, this is at least one way to account for both a stock’s growth prospects and value status. Here are Capital Growth’s five largest holdings as of the end of March in stocks with five-year PEG ratios less than 1 (or see the full list of Heebner's stock picks).
Leading our list is the asset management firm’s largest holding at the end of Q1, Citigroup (NYSE: C). Citigroup, as it happens, was one of hedge funds’ ten favorite stocks during the quarter (check out our full top ten list). Analyst expectations for next year imply a forward earnings multiple of 9, with continued improvements on the bottom line beyond that points resulting in a PEG ratio of 0.90. Citi also should be noted for trading at a discount to the book value of its equity, and in fact, its earnings have been up strongly going by recent reports.
Heebner and his team reported a position of 1.8 million shares in Whirlpool (NYSE: WHR). The household appliance company has more than doubled in price in the last year, with many investors seeing it as a way to play a rising housing market. The sell-side agrees, with a PEG ratio of only 0.50. With earnings more than doubling in the first quarter of 2013 versus a year earlier (though we’d note this came entirely through higher margins), the trailing P/E is 18 which would certainly be an attractive valuation if we were confident high growth would continue.
Capital Growth Management cut its stake in Delta Air Lines (NYSE: DAL) by 34% but still owned 7.3 million shares at the beginning of April. Airlines have done well over the last year as bulls have hoped that the merger of US Airways and American, by reducing competition, will increase companies’ pricing power. Still, a general unease among investors for getting into the traditionally prone to bankruptcy industry has left valuations arguably in value territory. Consensus forecasts for 2014 imply a forward earnings multiple of only 6.
According to the 13F, Heebner had 1.3 million shares of $7.5 billion market cap packaging products company Rock-Tenn (NYSE: RKT). In its most recent quarter, Rock-Tenn’s revenue was essentially flat compared to the same period in the previous fiscal year (net income was up, but at an unsustainable rate). Still, the stock carries trailing and forward P/Es of 14 and 12, respectively, and so, the company does not need to generate much growth in order to justify the current valuation. It may be worth watching for further developments or researching further if an investor has an interest in the industry.
Hertz Global Holdings (NYSE: HTZ), which rents construction and industrial equipment as well as cars, was another of the fund’s high upside potential picks as the filing disclosed a new position of 4.9 million shares. Hertz’s fortunes are closely tied to those of the broader economy, as shown by the stock’s beta of 2.8. Earnings are expected to increase considerably from their levels over the trailing four quarter period, resulting in a five-year PEG ratio of 0.50. Last quarter, the company’s revenue came in 24% higher than its levels in the first quarter of 2012.
We think that Hertz is an interesting growth play, and would say the same for Whirlpool, though of course we’d want to more closely check out each of these companies before buying. Delta also looks somewhat appealing, though in that case, the low PEG ratio is likely less due to high growth prospects and more due to investors pricing in a number of downside risks. Citigroup also looks like a potential value going by either book or earnings figures, although it is not too out of place compared to its peers.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Citigroup.The Motley Fool owns shares of Citigroup Inc , Hertz Global Holdings, and Rock-Tenn Company. 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!