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: