Tiger Cub John Griffin’s High Upside Potential Picks

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We can screen stocks for “upside potential” through the PEG ratio, which takes into account both a stock’s price-to-earnings multiple and analyst expectations for future growth (we emphasize that this is only a measure of upside potential because analyst forecasts aren’t always correct). Since we at Insider Monkey track 13F filings from hundreds of hedge funds as part of our work researching investment strategies, we can also look through individual managers’ filings for ideas with high upside potential, which investors may want to research further. Here are five picks from Tiger Cub John Griffin’s Blue Ridge Capital’s 13F for the first quarter of 2013 that feature five-year PEG ratios less than 1 (or see the full list of the fund's stock picks).

Two large finance & insurance companies

Blue Ridge trimmed its stake in American International Group (NYSE: AIG) by 17% in Q1, but still closed March with 8.7 million shares in its portfolio. AIG lost its place as the most popular stock among hedge funds to Apple between January and March, but remained in the top three (check out the full top ten list). The insurer has outperformed the market over the last year but is still valued at a significant discount to book with a P/B ratio of 0.7, and given analyst expectations for the next several years its PEG ratio is just below 1.

According to the 13F, Blue Ridge initiated a position of 4.7 million shares in Citigroup (NYSE: C) in the first quarter of this year. Citi reported a 30% increase in net income in the first quarter of 2013 versus a year earlier, and while we’d certainly expect growth rates to cool over time, analyst expectations suggest that future earnings will be high enough to leave the stock undervalued. In addition, we’d note that, as with AIG, Citigroup’s P/B ratio (of 0.8) suggests that the current market price represents a discount to book value.

More high upside potential picks from Griffin’s portfolio

Griffin and his team kept their holdings of Liberty Global (NASDAQ: LBTYA) about constant through the quarter at 3.9 million shares. The TV, Internet, and phone company (which mostly operates in Europe and Chile) is expensive in terms of its trailing earnings (as well as its trailing EBITDA, if we consider its enterprise value as well) but the sell-side is optimistic about the future. Revenue rose by 9% in its last quarterly report compared to the first quarter of 2012. The most recent data shows that 14% of the float is held short.

Owens Corning (NYSE: OC) was another of the fund’s high upside potential picks, as the filing disclosed ownership of 7.2 million shares. As a producer of glass fiber and building materials, it is one way to play further improvements in the U.S. housing market (the stock’s beta of 2.0 shows the company’s sensitivity to the broader economy). Bullish expectations from Wall Street analysts, who are generally positive on housing at this time, have the stock trading at only 12 times forward earnings estimates, with a PEG ratio well below 1, though revenue numbers have been flat recently.

Griffin was buying Wyndham Worldwide (NYSE: WYN) during the first quarter as well. Hotel stocks (though we would note that Wyndham includes a vacation ownership business as well) are generally priced at fairly high trailing earnings multiples in the current market, and Wyndham is no exception with a P/E of 21 on that basis. While analysts are optimistic about its future as well, earnings were down in its most recent quarter compared to the same period in the previous year, and even though revenue was rising we would still be cautious as a result.

Conclusion

We would avoid Liberty Global as well as Wyndham, and in the case of Owens Corning we don’t find the valuation that attractive unless the housing market is in fact strong enough for the company to hit its targets- and there might be better options to play that macro thesis. Citigroup and AIG are certainly cheap in book terms, and the mega-bank offers strong performance numbers in recent reports; we’d be interested in learning more about these companies as potential value options and comparing them to their 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 recommends American International Group. The Motley Fool owns shares of American International Group and Citigroup Inc and has the following options: Long Jan 2014 $25 Calls on American International Group. 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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