One way to reasonably measure a stock’s upside potential is through the PEG ratio, which corrects the P/E multiple for the analyst consensus earnings growth rate over the next several years. Street projections are often wrong of course, but the metric is still useful as an initial screen for investment ideas. We track many long equity positions from hedge funds and other notable investors in our database of 13F filings; we can not only use this information to develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) but also to see which stocks a particular fund manager likes, including those with low PEG ratios. Read on for our quick take on five stocks that billionaire Glenn Dubin’s Highbridge Capital Management owned at the end of December with high upside potential (or see the full list of Dubin’s stock picks from the 13F):
Cosan Limited (NYSE:CZZ), a $5.5 billion market cap company which produces cane sugar and ethanol fuel, was the largest holding by market value in the fund’s portfolio. Highbridge owned almost 32 million shares according to the filing. The company’s revenue was up 38% last quarter compared to the fourth quarter of 2011, and net income more than doubled. Cosan will have to continue to do well since it trades at 25 times trailing earnings, but the forward P/E (for the fiscal year ending March 2014) is only 14 and analysts expect more growth following that point. We think that Cosan might be worth investigating as a growth stock.
Transocean, and two more stocks Highbridge owned:
A more pure-play equipment rental company, United Rentals, Inc. (NYSE:URI) also makes our list of Dubin’s favorite stocks which satisfy the criterion of a low PEG ratio (0.6 in this case). United Rentals carries an even higher beta than Hertz does, at 3.1. At a market capitalization of $4.9 billion, it too boasts a forward P/E of only 9 as earnings are expected to be much higher than they were in the last four quarters. Point State Capital cut its stake in United Rentals last quarter but still disclosed ownership of 2.2 million shares; that fund is managed by Sean Cullinan (check out Point State’s stock picks).
Highbridge owned 1.9 million shares of Broadcom Corporation (NASDAQ:BRCM), the $20 billion market cap semiconductor company. Billionaire Ken Griffin’s Citadel Investment Group also liked Broadcom, increasing its holdings by 19% between October and December (research more stocks Griffin was buying). While earnings were down in the fourth quarter of 2012 versus a year earlier, sales were up and the financial community seems to expect the bottom line to run positive as well over the next couple years: Broadcom carries trailing and forward P/Es of 28 and 11, respectively.
Transocean LTD (NYSE:RIG) rounds out our list of Dubin’s picks with high upside potential: the five-year PEG ratio here is 0.5, with the fund reporting ownership of 1.2 million shares in its 13F. Various costs related to the Deepwater Horizon disaster- as well as high activity in onshore drilling, which is cheaper than offshore- have held Transocean back a bit but analyst consensus implies a forward earnings multiple of 9. Billionaire activist Carl Icahn initiated a position in Transocean in the fourth quarter (see more stocks Icahn likes) and more recently filed to report crossing the 5% ownership threshold.
Disclosure: I own no shares of any stocks mentioned in this article.
