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Andreas Halvorsen Likes These Low-P/E Stocks – Which One Is Best?

December 30, 2011 | About:
Federico Flom

Federico Flom

6 followers
Viking Global Investors LP was formed in 1999 and is based in Greenwich, Conn. Viking manages two hedge funds invested in equities worldwide. Andreas Halvorsen is a founding partner and currently serves as its CIO Since its foundation, Halvorsen's Viking Global Equities III fund has gained 22% on average per year until March 2009. The largest down period was from September 2001 to March of 2002, when Halvorsen’s portfolio was down about 12%.

Viking is a long/short global equity fund with a bottom-up stock picking approach. “We believe that our thoughtful analysis and disciplined valuation over time yield a diversified portfolio of longs and shorts whose stock price developments will deviate from each other and provide a profitable spread,” said John Myers, a member of the board.

Analysts are encouraged to invest in stock choices they find compelling, regardless of management sentiment: “When we had strong conviction in an investment and scaled it, our success rate increased – in other words, our high conviction has been correlated with improved odds of being right.”

Prior to founding Viking, Mr. Halvorsen was a senior managing director and the director of equities at Tiger Management LLC. He also worked as an investment banker in the corporate finance and merger departments of Morgan Stanley.

Below are Viking's lowest-P/E stocks:

Capital One Financial Corp. (COF): COF has a P/E of just below 6, which is very low. The market is almost valuing no future business growth at the current levels.

Capital One Financial is a diversified financial institution. It is one of the largest issuers of Visa and MasterCard credit cards in the U.S., and it is one of the largest depositary institutions in the U.S. In addition, the firm has an auto finance segment and a global financial services segment, which includes foreign credit cards and other lending such as small-business loans.

Net income from continuing operations was $865 million and total revenue for the reported quarter stood at $4.15 billion.

Net interest income rose 4.7% sequentially and 5.6% y/y to $3.28 billion. Similarly, non-interest income also rose 1.6% sequentially but fell 4.0% year over year to $871 million. Its P/E ratio was 6.07. Capital One is well-reserved and well-capitalized.

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LyondellBasell Industries NV (LYB): With a P/E of 6, this stock is severely undervalued.

LYB is a manufacturer of chemicals and derivatives. It also operates as a refiner of heavy high-sulfur crude oil produce and is engaged in the marketing and selling of polyolefins, polypropylene and polyethylene resins.

The last quarter was its best quarter ever. Net income was $895 million and EBITDA exceeded $1.7 billion. Year-to-date EBITDA was $4.7 billion and earnings per share were $4.12. Its P/E ratio reached 6.02.

The company has improved its financial standing, has a sound business model and most importantly, has been able to effectively recover from bankruptcy that did not lose the company significant market share. All this has turned the firm into a very interesting and solid pick.

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Citigroup Inc. (C): One of the banks with the strongest balance sheets, it has a P/E of 7.51

Citigroup is a global financial services company doing business in more than 160 countries and jurisdictions. It has been able to increase its presence particularly in Asia and Latin America.

Citigroup is now in good financial health, with a tangible common equity ratio of 7.5% and an allowance for loan losses sufficient to cover more than 5% of its loan book. The company is also now consistently profitable. Its P/E ratio is 7.51.

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Hartford Financial Services Group Inc. (HIG): Financials keep offering low P/Es, the market is discounting no or minimum growth for the next years.

Hartford Financial Services offers a diverse range of property-casualty, life insurance, annuity, and mutual fund services to a customer base of individuals and corporations. Hartford's products include workers' compensation, auto and homeowners' insurance, and life insurance products for employees and individuals. They are distributed via financial institutions, direct Internet sales, affinity groups, and a network of more than 11,000 independent agents.

Last quarter has seen earnings of $33 million and a P/E ration of 7.75. Hartford primarily benefits from economies of scale and can provide its products and services at lower costs than other, smaller insurers thanks to the distribution network.

Furthermore, Hartford has a wide product portfolio and has spread geographically speaking.

This provides the company with significant cross-selling opportunities and partially isolates it from slowdowns in particular areas of its business.

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Cigna Corp. (CI): This diversified company has a P/E of 8. I do not like to invest in health care but for some investors this stock could be attractive.

Cigna is a diversified insurance company with a focus on fee-based health insurance administrative services. The company is one of the nation's largest managed-care organizations, with more than 11 million medical members. Significant business lines include disability and life insurance, international supplemental health, life, and accident insurance, and specialty coverage, such as behavioral health, dental, and pharmacy benefits.

Cigna is highly leveraged, with assets around seven times equity. Unfortunately, the company is permanently exposed to financial volatility in regard to its investment portfolio, retained liabilities for discontinued reinsurance products, and its underfunded pension plan.

However, these risks are somewhat mitigated by reinsurance contracts with other insurers and by the fairly reliable free cash flows generated by Cigna's ongoing core businesses.

With a concentration in fee-based ASO business, Cigna is less exposed to fluctuating medical costs and certain provisions of health-care reform.

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Rating: 3.3/5 (6 votes)

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