Billionaire George Soros’ 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.

Several weeks after the end of each quarter, hedge funds and other notable investors, including billionaire George Soros, file 13Fs with the SEC, disclosing many of their long equity positions as of the end of the previous quarter (with the most recent filing referring to portfolios as of the end of March). Even though this information is a bit old, there are still a few ways for investors to make us of it.

We’ve found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year, and think that more strategies are possible as well. We can also screen top managers’ picks according to a number of criteria, including low earnings multiples, in search of any interesting investment ideas which might be worthy of further research. We have gone through Soros’ filing and here are his five largest holdings in stocks with both trailing and forward P/Es of 14 or lower (or see the full filing on our website).

Investments in unpopular industries- airlines and fertilizer

The billionaire’s top pick in this category was US Airways (NYSE: LCC), with 7.8 million shares in his portfolio at the beginning of April. US Airways is buying American Airlines out of bankruptcy, and many analysts believe that this consolidation could lead to higher prices in the airline industry. The stock trades at only 6 times forward earnings estimates, however, as investors worry about the general unattractiveness of airlines as well as integration risk. We’d note that many other airlines also carry low multiples and as such might be more attractive value plays.

Soros and his team nearly tripled their holdings of fertilizer company Mosaic (NYSE: MOS) to a total of 1.6 million shares. Mosaic trades at 12 times trailing earnings; similarly to airlines, fertilizer and other agriculture related companies tend to be cheap in the current market environment. The company’s net income grew 26% in its most recent quarter (for the fiscal quarter ending in February) compared to the same period in the previous fiscal year. However, revenue numbers were up only slightly so earnings growth at that level is probably not sustainable.

Other cheap picks

Macy’s (NYSE: M) was another of Soros’ cheap picks: the filing disclosed ownership of 1.1 million shares, while the department store carries trailing and forward P/Es of 14 and 11, respectively. With Wall Street analysts expecting further improvements on the bottom line over the next several years, the five-year PEG ratio is 0.90. As with Mosaic, while Macy’s has been delivering good earnings growth this has primarily come from wider margins; still, the stock is cheap enough and recent performance has been strong enough that we’d be interested in learning more about the company.

According to the 13F, Soros had 1.5 million shares of General Motors (NYSE: GM) in his portfolio at the end of the first quarter of 2013. GM didn’t do that great last quarter, as its earnings dropped 11% compared to Q1 2012 as growth in the U.S. was offset by poor numbers in other markets. The automaker is an analyst darling, with bullish expectations from the sell-side implying a forward P/E of only 8 and a five-year PEG ratio well below 1. In addition, GM was one of the five most popular stocks among hedge funds last quarter (check out the full top ten list).

A company which has since received a buyout offer

Rounding out our list of Soros’ cheap stock picks is $1 billion market cap semiconductor designer Spreadtrum Communications (NASDAQ: SPRD). The company’s products are used as wireless communications products, including in smartphones. In late June, Chinese company Tsinghua Holdings offered $28.50 per share for Spreadtrum; as of this writing, the stock is trading at about $26.50, reflecting a 7% discount to the potential transaction price. Spreadtrum is still evaluating the offer, and even if they accept it, there would be a need for regulatory approval.

Conclusion

Macy’s seems to be holding up well in the face of Internet and big-box competition, and its valuation makes it look interesting -- it is at least a potential value stock at these levels. We’ve mentioned that Mosaic and US Airways derive their low multiples in part from their industry, meaning that we’re not sure they’re any more appealing than their peers, and we’d lump GM into that category as well. 

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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 recommends General Motors. 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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