One way to estimate a stock’s upside potential- while, to some degree, restricting oneself to fairly reasonable earnings projections- is to use the PEG ratio, which is derived from analyst expectations of earnings growth and the traditional P/E multiple. Of course, the sell-side is often wrong and so “high growth potential” should be treated like any other screen: a list of suggestions to consider further before making any decisions. We decided to look for high upside potential stocks that billionaire Leon Cooperman’s Omega Advisors reported owning in its most recent 13F filing (see the full list of Cooperman’s stock picks). Here are five stocks which Omega had over $100 million invested in and which had low PEG ratios (indicating that their P/Es are lower than their expected growth rates would predict):
Omega’s top stock pick, American International Group, Inc. (NYSE:AIG) is quite a high potential pick: the PEG ratio is .43 as the market is placing a low value on its earnings but Wall Street analysts expect solid growth in net income. AIG also looks cheap in terms of book value, as it trades at about half the book value of its equity. These attractive value characteristics made it one of the ten most popular stocks among hedge funds in the third quarter of 2012 (see the full top ten list). The fund owned 8.1 million shares of AIG after increasing its stake by 76%.
Cooperman and his team also liked SLM Corp (NASDAQ:SLM), or “Sallie Mae,” reporting a position of almost 16 million shares. The student loan servicer and processor trades at 8 times earnings, whether we consider trailing results or analyst consensus for 2013, and the PEG ratio is 0.7. D.E. Shaw, founded and managed by fellow billionaire David Shaw, was buying the stock during the quarter and closed September with 5.4 million shares in its portfolio (check out more stocks D.E. Shaw was buying). We’re a bit worried about the student lending industry but Sallie Mae might be worth consideration.
Omega also liked Apple, Transocean, and a mortgage services company:
Apple Inc. (NASDAQ:AAPL) was the most popular stock among hedge funds in the third quarter, and Omega was one of the many funds in our database behind it. Apple Inc. (NASDAQ:AAPL)’s PEG ratio is 0.5, as the Street sees little earnings slowdown in the next several years but the market is so skeptical of the company’s prospects that the trailing P/E is only 12- a figure which generally implies little to no improvement on the bottom line. Even though we’re not as bullish as the analysts, we’re quite interested in Apple Inc. (NASDAQ:AAPL) as we expect at least some growth from the company. Find more tech stocks hedge funds love.
The fund added to its position in Transocean LTD (NYSE:RIG) for a total of 3 million shares. Transocean is an offshore contract driller; while the market is wary of the company due to its role in the Deepwater Horizon disaster, analyst consensus is for enough earnings this year to make for a P/E of 11 and even continued growth to bring the PEG to 0.5. Billionaire Steve Cohen’s SAC Capital Advisors cut its stake in the company but still owned 1.9 million shares (research Cohen’s favorite stocks). We think that it might be a good value stock.
Omega reported owning 1.3 million shares of Altisource Portfolio Solutions S.A. (NASDAQ:ASPS). Altisource is a $2.2 billion market cap mortgage portfolio management services company. Its revenue and earnings were up strongly in the third quarter of 2012 compared to the same period in the previous year. The market has priced in some additional growth- the trailing P/E multiple is 22- but the sell-side still considers the stock cheap with their expectations generating a PEG of 0.4, and the recent growth rates are high enough that we could have a “growth at a reasonable price” stock here. Renaissance Technologies, whose founder Jim Simons is now a billionaire, also had a position in Altisource (see more stocks Renaissance owned).
Disclosure: I own no shares of any stocks mentioned in this article.
