Billionaire T. Boone Pickens’ High Upside Potential Picks Include Transocean

We track 13F filings from hedge funds and other notable investors, such as billionaire oilman T. Boone Pickens. By compiling these filings in our database, we have been able to research investment strategies and have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small cap strategy). Of course we can also think of filings as free investment ideas that investors can do more research on if they sound appealing, similarly to how stock screens are often used. We can then combine ownership of a stock with other criteria, including the PEG ratio (which considers both the trailing earnings multiple and analyst estimates of future earnings growth, and is therefore considered a measurement of upside potential if the analysts are correct). Here are five stocks with Pickens owned at the end of 2012 with low five-year PEG ratios (or see the full list of stocks Pickens owned):

The billionaire’s largest holding by market value according to the 13F was about 350,000 shares of Valero Energy Corporation (NYSE:VLO), an oil and gas refining and marketing company with a market capitalization of $25 billion. Valero has risen 69% in the last year, and it qualifies as having high upside potential given that it trades at 12 times trailing earnings while the sell-side expects substantial earnings growth. Cliff Asness’s AQR Capital Management increased its position in Valero by 82% between October and December, to a total of 1.1 million shares (research more stocks Asness was buying).

T Boone PickensPickens had a little over 90,000 shares of oil and gas drilling equipment and services company National Oilwell Varco, Inc. (NYSE:NOV) according to the 13F. Similarly to Valero, the trailing P/E is low and the sell-side is expecting decent growth rates over the next several years; here that makes for a PEG ratio of 0.8. Revenue and earnings grew at double-digit rates last quarter compared to the fourth quarter of 2011. Warren Buffett’s Berkshire Hathaway was buying National Oilwell Varco in Q4, closing 2012 with 5.3 million shares in its portfolio (find Buffett’s favorite stocks).

Halliburton Company (NYSE:HAL), another equipment and services company, was also one of Pickens’s picks at a position of about 150,000 shares. Halliburton was one of the most popular energy stocks among hedge funds for the fourth quarter of 2012 (check out more energy stocks hedge funds loved). Net income was down 26% in the fourth quarter of 2012 versus a year earlier despite a rise in sales. However, Wall Street analysts are expecting a recovery over the next couple years as can be seen from the fact that the trailing and forward earnings multiples are 14 and 10 respectively.

According to the filing Pickens kept his position in offshore driller Transocean LTD (NYSE:RIG) about constant at a little over 110,000 shares. Transocean’s revenue numbers have been ticking up, though the company is still experiencing poor sentiment related to the Deepwater Horizon disaster. Consensus earnings for 2014 imply a forward P/E of only 9, which would be low as long as the company could keep its business steady from that point forward. Billionaire Carl Icahn has bought over 5% of Transocean’s outstanding shares (see Icahn’s stock picks) and is urging the company to return more cash to shareholders.

Pickens initiated a position of about 420,000 shares in Weatherford International Ltd (NYSE:WFT), another oil and gas equipment and services company, in the fourth quarter of 2012. At a market capitalization of $9 billion, Weatherford is valued at 9 times forward earnings estimates following a 34% decline in price in the last twelve months. Revenue growth was 9% in its most recent quarter compared to the same period in the previous year. Billionaire Jeffrey Vinik was also buying Weatherford and owned 5.5 million shares after not having any long position at the end of September.

Disclosure: I own no shares of any stocks mentioned in this article.

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