MeenaKrishnamsetty

Matt Doiron (Insider Monkey)

Insider Monkey provides high-quality evidence-based articles to inform individual investors about the intricacies of investing.

Value investors like to use price-to-earnings multiples as a crude shortcut to determine how a stock’s valuation compares to the company’s earnings. Of course, this metric doesn’t account for a stock’s growth potential; one way to do this is to use the PEG ratio, which places the P/E multiple in the context of the future growth rate expected by sell-side analysts.

Obviously, the PEG ratio is highly dependent on analyst estimates, and these are not always correct. We still think that it is worth considering stocks with low PEG, as long as investors are aware that the estimates might be accurate and only buy the stock if they do believe in its upside.

Here are five stocks with low PEG ratios and which billionaire Dan Loeb’s Third Point had at least $50 million invested in according to its 13F for the third quarter of 2012 See the full list of stocks from Third Point’s 13F) :

Loeb moved heavily into American International Group Inc. AIG, -0.54%  , owning about 24 million shares at the end of the quarter. This made it his second largest position by market value behind Yahoo Inc. YHOO, -0.19%   . where Third Point has played a leading activist role. AIG made our list of the most popular stocks among hedge funds for the third quarter of the year (see the full rankings).

It’s easy to see a value case here with the company carrying a forward P/E of 10, and trading at only half the book value of its equity; further optimism from the Street implies a PEG ratio of 0.4.

$8.5 billion market cap oil and gas equipment and services company Weatherford International Ltd. WFT, -3.60%   was another stock in Third Point’s portfolio, with the fund reporting a position of 4 million shares.

Weatherford’s stock price is down 22% in the last year, and net income came in 63% last quarter than a year earlier. The PEG ratio of 0.5 suggests that analysts expect a strong rebound in the company’s numbers. Orbis Investment Management, which is managed by William Gray, owned 44 million shares at the end of September Check out Gray’s stock picks

Third Point owned 10 million shares of Delphi Automotive PLC DLPH, -1.46%   . a manufacturer of auto components including parts related to electrical, electronic, and powertrain systems. The entire auto ecosystem trades at low multiples, and Delphi is no exception: its trailing P/E is 9.

With the company’s earnings being about flat in the third quarter compared to the same period in 2011, and analysts expecting growth in the industry, the PEG ratio comes out to 0.5 here as well. Billionaire John Paulson cut his stake last quarter, but his Paulson & Co. still had 25 million shares in its portfolio See Paulson’s favorite stocks

Apple Inc. AAPL, -0.69%  was another of Loeb’s picks. It too has a five-year PEG ratio of 0.5, with analysts insisting that the company will be able to continue its high earnings growth rates while the market seems to expect no growth- the trailing P/E multiple is only 12. Apple was actually the most popular stock among hedge funds last quarter, and therefore the top tech stock as well Find more tech stocks hedge funds are crazy about

We wouldn’t be quite as optimistic as the analyst consensus, but we do think that Apple can continue to deliver at least some growth and that it is therefore another good value play.

Health insurer WellPoint Inc. US:WLP   . which has a PEG ratio of 0.7, rounded out our list of high-upside Loeb picks. WellPoint trades at 8 times earnings, whether we consider trailing results or estimates for 2013.

The market is skeptical here as well, and we think this is due to a combination of the company’s flat results and worries over future government regulation of health insurers. Of course, even given the apparently low price we’d be cautious for similar reasons. Fellow billionaire Leon Cooperman’s Omega Advisors sold shares last quarter but still had 1.3 million shares at the end of September (research more stocks Cooperman is trading) .

Insider Monkey is a finance website that provides free insider trading and hedge fund stock-holdings data. It tracks more than 400 equity hedge funds. Follow it on Twitter @insidermonkey