Billionaire George Soros' Favorite Financial Stocks

Includes: AIG, C, COF, JPM, MS
by: Insider Monkey

By Matt Doiron

We like to use quarterly 13F filings from hedge funds and other notable investors to identify profitable investment strategies; for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. 13Fs are also more generally used by investors looking for stock ideas- while they don't intend to simply copy everything that a well-known investor owns, using the top picks from these filings as recommendations for further research (similarly to how stock screens are often used) is appealing to them. We think that this can be a valuable approach as well. Billionaire George Soros recently filed his 13F for the fourth quarter of 2012 (see the full list of stock picks from George Soros). Here are our thoughts on his top five stocks picks in the financial sector:

Citigroup Inc. (NYSE:C) was Soros's largest single-stock holding by market value at the beginning of 2013, with the filing disclosing a position of 8.1 million shares. Citigroup is currently priced at a significant discount to book value with a P/B ratio of 0.7. The bank has also been turning in an acceptable financial performance, with revenue up 5% and earnings up 25% last quarter compared to the fourth quarter of 2011. Citigroup might be a good value but some other large banks which are slightly more expensive might make for more reliable investments. The stock is up 23% in the last year.

Soros cut his stake in American International Group Inc (NYSE:AIG) but the insurer was still one of his top picks overall at 8.9 million shares. With many hedge funds buying into the stock, AIG became the most popular stock among hedge funds last quarter, surpassing Apple. Find more of hedge funds' favorite stocks. AIG's discount to book value is similar to Citigroup's, and analyst expectations for 2014 imply a forward P/E of 10. We think that AIG is still be punished by the market for its rescue during the financial crisis and would think that over time institutional investors should regain more confidence in the company.

The 13F reported that Soros had owned 2.6 million shares of JPMorgan Chase & Co. (NYSE:JPM) at the end of December after an increase in the size of his position during the fourth quarter. In terms of book value, JPMorgan Chase is more expensive than Citigroup. However, the bank has done a better job of earning income from its assets and as a result the trailing P/E is also low at 9. While JPMorgan Chase does not have as good a reputation for stability as peer Wells Fargo, we think it trumps Citigroup and some other peers including Bank of America there and is likely worth its "premium"- which still places it in value territory.

Soros initiated a position of 4.1 million shares in Morgan Stanley (NYSE:MS), giving him a pure-play investment bank in addition to the two financial supermarkets. While Morgan Stanley experienced a good Q4 in terms of revenue, which was up 24% versus a year earlier, earnings have not been particularly strong in recent months. Wall Street analysts are optimistic about Morgan Stanley, with their earnings expectations implying a forward earnings multiple of 9 and a five-year PEG ratio of 0.6. We might take a closer look at the bank though we would not give too much weight to sell-side consensus.

Capital One Financial Corp. (NYSE:COF), which operates Capital One Bank as well as its credit card business, rounded out Soros's top five financial picks. Capital One trades at 8 times earnings, whether we consider its net income on a trailing basis or use forward estimates for 2014. While book value might not be as useful a valuation metric here as it would be for a more standard bank, the stock does look cheap on that point as well with a price-to-book ratio of 0.8. As a result we would say that Capital One is a potential value play.

Disclosure: I am long C, MS.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.