Investors have generally been looking down on the financial sector for some time, but our review of recent 13F filings by hedge funds and other notable investors generally shows movement towards financial stocks. With one popular pick surging into the #3 spot on the list of the most popular stocks among hedge funds (see the full rankings), finance and insurance companies now compose half of the top ten list. Here are hedge funds’ favorite financial stocks for the third quarter of 2012:
American International Group was one of the hottest stocks in the hedge fund community during the last quarter, with 110 filers in our database reporting a position at the end of September. This was up from 61 filers three months earlier. AIG is tempting for value investors given that it trades at half the book value of its equity and at only nine times forward earnings estimates. Billionaire David Tepper’s Appaloosa Management was one of the funds initiating a position during the third quarter (see more of billionaire David Tepper's stock picks).
Citigroup was hedge funds’ favorite big bank with 93 funds owning the stock. Like AIG, it’s often seen as a failed, bailed-out company; like AIG, its P/B is quite low, at 0.6 in this case. Billionaire George Soros hadn’t owned the stock at the beginning of the quarter but had 1.5 million shares in his 13F portfolio at the end of September (find more stocks that George Soros has been buying).
85 hedge funds and other notable investors reported a position in Bank of America . Bank of America is even cheaper than Citigroup on a book basis, but the stock’s rally has left its P/E multiples not looking particularly strong, even against peers in the industry that are generally considered more safe. Its business has also been down recently.
Hedge funds also liked JPMorgan Chase , with ownership ticking up slightly to 83 funds. JPMorgan trades at a substantial discount to book value and at only nine times trailing earnings. With its earnings up 34% last quarter versus a year earlier, it looks attractive -- perhaps not quite as cheap as Citigroup, but likely meriting a premium due to its perception as a somewhat safer bank.
The final financial stock to make the top ten list was Wells Fargo , with hedge fund ownership broadening from 72 filers at the end of June to 81 three months later. Wells Fargo’s P/B ratio is 1.2, reflecting a good deal of investor confidence in the company’s books, but on an earnings basis it’s a good match for the other big banks.
There was a bit of a drop to the 58 filers in our database who owned Capital One (COF). Capital One is a credit card company, but those credit cards are backed by Capital One Bank. The company’s revenue and earnings were up in the third quarter compared to Q3 2011, and the trailing P/E is only 10.
52 funds reported owning Goldman Sachs Group (GS). Goldman has been regularly beating earnings estimates, and considering that the forward P/E is only nine we think that the investment bank is worth a look. Goldman, like many of these other financials, is priced at a discount to book value, and while this is somewhat justified (particularly given uncertainty over Europe), the write-downs required to make the stock overvalued would have to be quite large.
Funds generally sold out of Morgan Stanley (MS), but 45 filers in our database still had a position at the end of the third quarter. Morgan Stanley is more troubled than its peer Goldman: Revenue was down sharply last quarter from its levels in the third quarter of last year. However, its P/B is 0.5 and it’s another possible (possible!) value stock.
American Express Company (AXP) was owned by 42 hedge funds according to our analysis. We’d note that its services span credit and charge cards as well as travel services, possibly explaining its trailing P/E of 13, as investors like that business mix. The company’s numbers have been very stable over the last year.
Rounding out the list was life insurer Metlife (MET). Metlife has been taking hits to revenue and trades at 13 times trailing earnings, but Wall Street analysts expect a rebound: The forward P/E is only six and the five-year PEG ratio is 0.5.
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