Seth Klarman’s High Upside Potential Stock Picks: Oracle (ORCL) and More

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BAUPOST GROUPSeth Klarman, manager of the large hedge fund Baupost Group, wrote a book on investing entitled Margin of Safety in 1991. He has since become such a closely followed value investor that copies of the book have sold for $1,500. We have gone through Baupost’s recent 13F filing (see Klarman’s favorite stocks)and picked out some stocks which have high upside potential. We measure this by looking at each stock’s PEG ratio, which combines the P/E multiple with estimated earnings growth rates from Wall Street analysts. Keep in mind: these aren’t stocks with high upside, as analyst estimates could be far off, but with high upside potential. Here are four stocks with low PEG ratios and which Baupost had at least $50 million invested in according to the 13F filing:

The fund owned 15 million shares of Genworth Financial Inc (NYSE:GNW), which offers life insurance and other insurance products. At a market capitalization of $3.6 billion, Genworth trades at 10 times trailing earnings. While revenue was about flat in the third quarter compared to the same period in 2011, the sell-side expects significant earnings growth in the coming years: the forward P/E is 6 and the PEG ratio is 0.7. Billionaire Eddie Lampert’s ESL Investments had just over 12 million shares in its own 13F portfolio (check out Lampert’s stock picks). Even though we’re skeptical of the growth expectations, we think that the trailing earnings multiple is low enough that the company is worth a look.

Baupost initiated a position of 4.1 million shares in Rovi Corporation (NASDAQ:ROVI), a provider of interactive program guides and other digital entertainment technology products. The stock is down 36% in the last year as the business has struggled (sales were down 7% last quarter versus a year earlier). Analysts insist that the company is still a good value at the current price, which is only 8 times consensus earnings for 2013 and implies a PEG ratio of 0.8. Glenview Capital, which is managed by former Omega Advisors trader Larry Robbins, more than doubled its own stake in the company last quarter (find more stocks Glenview was buying).

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