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Shopping for Growth With Paul Tudor Jones

By    |   Wednesday, 17 December 2008 12:20 PM

Paul Tudor Jones is a well-known commodity trader, who has also had great success in the stock market in recent years.

He made his initial fortune trading cotton on Wall Street, and set out on his own in 1980. Jones founded Tudor Investment, which offers several hedge funds that have delivered average annual returns of 24 percent. The S&P 500 returned only 10.2 percent from 1980 to 2007.

With an estimated net worth of $3.3 billion, Forbes magazine ranks Jones as the 123rd richest American.

He is entirely self-made and self-taught. In the early 1980s, while trading commodities in Chicago, Jones was accepted to study at Harvard Business School.

Jones has said in the past, regarding his acceptance at the school, that, "This is crazy, because for what I'm doing here, they're not going to teach me anything. This skill set is not something that they teach in business school.”

Looking at his current stock holdings, I tried to discern what Jones has learned about stock investing over the years. He appears to be a growth investor, and his favorite measure of value seems to the PEG ratio.

The PEG ratio divides the P/E ratio by the growth rate of the earnings per share. Values under one indicate that the market is likely underestimating growth and the stock is undervalued. This indicator combines growth and value and seeks to find growth at a reasonable price.

Starting with that insight, this week’s screen looks for stocks that have the following characteristics:

  • A PEG ratio less than the industry average.

  • Only the largest 10 percent of stocks were considered because large funds like Tudor’s can’t trade smaller stocks.

  • Positive earning over the past year and a positive earnings estimate for next year.

  • The stock must be in the top half of all performers over the past year. Jones has been quoted as saying he thinks price moves before the fundamentals are recognized, and this criteria captures that.

  • The earnings yield (which is the inverse of the P/E ratio) needs to be greater than 15 percent to ensure a sufficient rate of return. Given the variety of investments available to hedge funds, this selects only the best potential values in the stock market.

  • Utilities and financials were excluded.

    Eleven stocks are on our list:

    Anadarko Petroleum (APC) is an oil and gas exploration and production company with more than 2 billion barrels of oil equivalent reserves, mostly in the United States. Recently priced at 40.20, the company has been beaten down with other oil stocks. This well-managed company has a net margin of 18 percent, three times the industry average.

    Apache (APA) is an independent energy company that finds, develops, and produces natural gas and crude oil around the world. The dividend yield is only 0.80 percent at the recent price of 74.60, but the company has been increasing the payout at an average rate of 31 percent a year for the past seven years.

    Becton, Dickinson and Co. (BDX) provides a variety of medical devices and diagnostic products used in hospitals and doctors' offices. Its return on equity is more than 24 percent, and the company is nearly debt free. Recently trading at 68.24, BDX yields 2.1 percent.

    Caterpillar (CAT), the industrial equipment manufacturer, was recently downgraded by Goldman Sachs. Analysts set a price target of $32 for the stock, well below its recent price of 43.80. Goldman, which famously forecast $200 oil earlier this year, could be wrong. CAT trades at 15 times the most pessimistic earnings estimates for next year. And, it stands to benefit from President-elect Obama’s proposed infrastructure programs.

    Cliffs Natural Resources (CLF) is a mining company with operations around the world. Trading near 26.87 recently, CLF has a P/E ratio of 5. The company expects to benefit from industrial growth in China and India. That makes it a relatively low-risk bet on rebounding economic conditions in these two countries.

    Crown Holdings (CCK) is a food and beverage can manufacturer. Last year, 73 percent of sales were derived from operations outside the United States, giving CCK the ability to withstand the U.S. recession. Barron’s recently highlighted the stock and reported a price target of 38, nearly double the recent price of 19.42.

    Eaton (ETN) is a diversified industrial manufacturer that was recently on Warren Buffett’s buy list. The Oracle of Omaha bought almost 2 percent of the company in the last quarter. At the recent close of 42.96, ETN is now priced below the level of Buffett’s initial purchases and pays investors a 4.5 percent dividend.

    Hess (HES) is an integrated oil company, involved in every stage from exploration to gas stations. The company recently cut back on its capital spending plans for next year, demonstrating good management by keeping spending in line with projected cash flow. HES grew earnings per share by an average of 56 percent for the past five years, but should see single digit earnings growth in the future. At a recent price of 49.78, the P/E ratio of 5 prices that slow growth into the stock.

    Nucor (NUE) is a steel manufacturer, accounting for 20 percent of US steel production. NUE is the low cost producer, using scrap steel from automobiles and demolitions which is then recycled in its mini-mills. The mini-mill method is recognized as being more efficient in energy, labor, and raw material costs. NUE offers investors a 3.2 percent dividend yield at the recent price of 45.65.

    Occidental Petroleum (OXY) is the fourth oil company on our list. Free-cash-flow has increased by an average of 36 percent a year for the past five years, and the company enjoys a net margin of more than 30 percent. Recent price: 57.44.

    Whirlpool (WHR), the appliance maker, is a company that can benefit from the push toward green technology. Since new appliances are more energy efficient, WHR stands to gain from any new regulations imposed by the next president’s administration. With a 4.2 percent dividend at the recent price of 41.55, WHR seems undervalued.

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    Paul Tudor Jones is a well-known commodity trader, who has also had great success in the stock market in recent years. He made his initial fortune trading cotton on Wall Street, and set out on his own in 1980. Jones founded Tudor Investment, which offers several hedge funds...
    Wednesday, 17 December 2008 12:20 PM
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