One way to estimate a stock’s upside potential is by looking for a low PEG ratio, which incorporates both the P/E multiple and analyst expectations for earnings growth. While analyst projections are often too rosy, investors can at least treat the PEG ratio as a screen and then do more research on appealing companies. We can also use our database of hedge fund 13F filings, which we use to research investment strategies (for example, we have found that the most popular stocks among hedge funds produce an average excess return of 18 percentage points per year) to see top picks from different investors which met this screen. Here are five stocks which billionaire Leon Cooperman’s Omega Advisors had at least $80 million invested in at the end of 2012 and which had five-year PEG ratios of 0.8 or lower (or see the full list of Cooperman’s stock picks):
One of the fund’s largest holdings by market value was its nearly 16 million shares of SLM Corp (NASDAQ:SLM) or “Sallie Mae.” Investors are concerned about the education lender, and as a result SLM trades at 11 times trailing earnings- clearly value levels. With the sell-side projecting earnings growth over the next several years, the PEG ratio comes in at 0.7; in addition Cooperman, who likes dividend stocks, may find SLM’s yield of 3% attractive. It’s not a pure income stock but could be worth looking into on value grounds.
Omega increased its stake in Express Scripts Holding Company (NASDAQ:ESRX) by 38% to a total of 2.7 million shares. Express Scripts, a pharmacy benefit management services company, had made our list of the most popular healthcare stocks in the fourth quarter of 2012 (find more healthcare stocks hedge funds loved). With the company recovering from its dispute with Walgreen’s, the forward earnings multiple is only 12 and the PEG ratio is 0.8. If we annualize recent results, we get that very little growth is required to make the stock undervalued given its pricing.
Transocean LTD (NYSE:RIG) was another of Cooperman’s stock picks at a position of 3.1 million shares. Offshore drilling is dependent on an expectation of continued high oil prices since it represents a more expensive initial investment than onshore activity. Wall Street analysts are very bullish on Transocean, which carries a forward P/E of only 9 with further earnings growth expected beyond that point. Revenue increased 11% last quarter compared to the fourth quarter of 2011, so at least in terms of sales Transocean may be improving its financials.