A Hatful of Cheap Shares

 | Mar 20, 2013 | 11:00 AM EDT  | Comments
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Even though 13F filings are only made public a few weeks after the quarter in question, there are many ways to use this information -- that is, the long positions of hedge funds and other big investors. For instance, these data can help folks develop investment strategies, given the solid outperformance of certain hedge fund picks. Investors can treat a hedge fund's top picks like a stock screen, potentially combining these lists with other metrics to yield nice investment ideas. With that in mind, let's take a look at the five largest positions from Barry Rosenstein's Jana Partners at the end of the year, as seen in the 13F, that have price-to-earnings ratios no higher than 14x.

To start with, the fund has a 9.4-million-share position in agricultural name Agrium (AGU), which is valued at 11x trailing earnings. The company, with market capitalization of $15 billion, is the fund's largest position -- and Rosenstein has been taking an activist role in the company, arguing that it should split those two business units. However, management has been resisting these efforts. Agrium's P/E ratio says the market expects the business to remain more or less static, and it certainly has not priced in any improvement, whether from a breakup or other factors. In addition, the most recent revenue has shown little change from a year earlier.

Jana also upped its stake in Coventry Health Care (CVH) by 14%, to a total of 3.1 million shares. Coventry is a health insurer with a market cap of $6.3 billion. Many health insurers trade at relatively low earnings multiples -- we imagine many investors are worried about future regulations should the government decide that healthcare costs are rising too quickly -- and Coventry is no exception, with a trailing P/E of 13x. With Coventry revenue and earnings up at double-digit rates last quarter, we would suggest taking a closer look at the stock.

Rockwood (ROC) was another of Rosenstein's top picks, with a reported position of 2.8 million shares -- up considerably from three months prior. Product demand at this specialty-chemicals company is largely determined by the broader economy, so the stock's beta is 2.5. Also, despite a slight rise in fourth-quarter revenue, contracting margins sharply pulled down that quarter's income vs. the prior year. Still, the earnings multiples are in the 13x-to-14x range, which suggests that analysts expect Rockwood's business to stabilize.

Then there's Aetna (AET) -- which, together with the Coventry pick, could signal that Jana likes health insurers in general. The stock's trailing and forward P/Es are at 11x and 9x, respectively, much in line with where its peers trade. We would note that earnings have been down of late -- so if you're considering this name, you'll want to investigate the reasons for this before you buy. (Billionaire David Einhorn's Greenlight Capital also likes insurers, and recently upped its Aetna position by nearly half 48% to 6.5 million shares.)

Lastly, Rosenstein initiated about a 350,000-share position in Big Lots (BIG), a retailer that offers clearance merchandise and operates more than 1,500 stores in the U.S. and Canada. The stock's beta of 0.9 is a bit higher than we would expect at a low-priced retailer. Also, while it trades at only 12x trailing earnings after a 21% drop in the past year, the most recent data say 15% of the outstanding shares are being held short. Even though the financials look stable and the stock is cheap, we'd be a bit careful here; that is a sizable bearish community.

-- Written by Matt Doiron

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