One way to determine a stock’s upside potential is to use the PEG ratio, which places the P/E multiple- a traditional value metric- in context with the company’s expected earnings growth rate (faster growing companies should generally trade at higher earnings multiples). PEG ratios less than 1 generally indicate that the company is expected to grow more strongly than the P/E multiple implies. Of course, earnings don’t always end up matching expectations, but the PEG is at least one way to see the potential upside in the stock. Here are five stocks with low PEG ratios and which billionaire John Paulson’s Paulson & Co. (find more stocks Paulson liked) had at least $100 million invested in at the end of September:
Paulson cut its stake in InterDigital, Inc. (NASDAQ:IDCC) but still owned 3 million shares of the $1.7 billion market cap wireless communications technology and intellectual property company. Per analyst estimates and the current market price, the PEG ratio here is .41 though judging by the very volatile financial performance over the last several quarters and the fact that earnings are expected to be negative next year this is not a straightforward story. First Pacific Advisors, which is managed by Robert Rodriguez and Steven Romick, had about 2 million shares in its own portfolio at the end of the third quarter.
One of the fund’s largest positions was its 25 million shares of auto parts company Delphi Automotive PLC (NYSE:DLPH). The auto industry, and many related industries, are seen to have quite a bit of upside potential if macro numbers improve and Delphi is no exception. At 10 times trailing earnings, the PEG ratio is only 0.6. However, as is the case with other auto related companies, there’s little sign as yet of an actual recovery in the market. In the third quarter of the year, revenue was down 7% compared to the same period in 2011 and net income was up only slightly. Fellow billionaire Paul Singer’s Elliott Management reported owning about 29 million shares (check out more of Singer's stock picks). We think that Delphi is probably better than buying some automakers, but we’d look for better values in the auto business first.
Another of the ten largest 13F holdings was Hartford Financial Services Group Inc (NYSE:HIG), which is primarily a property and casualty insurance company. The forward P/E multiple here is only 7, and with further growth expected from the sell-side the PEG ratio is 0.7. Appaloosa Management, which is managed by billionaire David Tepper, more than tripled the size of its own position during the third quarter to a total of 3.6 million shares (see Tepper's favorite stocks). The stock is tied closely to the broader economy with a beta of 2, but we think that it could be worth further investigation.
Paulson initiated a position of almost 24 million shares in MetroPCS Communications Inc (NYSE:PCS), which also has a PEG ratio of 0.7. However, revenue growth at MetroPCS has been limited and the Street is actually currently projecting a decline in net income next year (with, presumably, a recovery to follow). Billionaire James Dinan’s York Capital Management also liked the stock, buying over 6 million shares last quarter (research more stocks Dinan was buying), but we think that we’d avoid it.
HCA Holdings Inc (NYSE:HCA), a large hospital company (the current market cap is over $13 billion), rounded out our list of Paulson’s high upside potential picks with a PEG ratio of 0.7. The stock is trading at only 8 times consensus earnings for 2013, so HCA would have to start underperforming expectations very soon to prove anything but undervalued at these prices. Of course, there is quite a bit of uncertainty as to how federal policies will affect the entire healthcare sector, including hospitals, and many investors may want to stay away from the stock for that reason alone. Glenview Capital increased its holdings of a number of hospitals, including HCA; the fund is managed by Larry Robbins, who had previously worked under Leon Cooperman at Omega Advisors. Find more stocks Glenview liked.