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.
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.
The 13F disclosed ownership of 3.9 million shares of NYSE Euronext (NYSE:NYX) following a large increase in Omega’s holdings during the fourth quarter of 2012. Last quarter NYSE Euronext’s revenue fell 14% compared to the fourth quarter of 2011, contributing to a 75% drop in net income. As a result it is more of a company whose valuation is dependent on a recovery in business conditions; the trailing earnings multiple is 27. We would need to see better numbers from NYSE Euronext before considering it as a growth stock, and would avoid it for now.
Cooperman and his team sold some of their holdings of Altisource Portfolio Solutions S.A. (NASDAQ:ASPS), a $1.7 billion market cap mortgage investment management services company. Altisource has high customer concentration, with Ocwen Financial making up a large share of revenues, but Ocwen is growing its business rapidly including by acquisition. Currently the trailing P/E is 16, and when we consider growth estimates the market is clearly being more pessimistic than the analyst consensus.
We don’t think that NYSE Euronext is an attractive value stock right now. While Transocean is cheap in terms of forward earnings estimates, and might be worth a look, we are a bit skeptical as to how supportive oil prices will be and would need to game out how well the company might do if prices fell. Altisource, Express Scripts, and Sallie Mae do have risks but in terms of their current business they seem priced cheaply and certainly the former two companies have opportunities for potential growth making them quite interesting from our point of view.
Disclosure: I own no shares of any stocks mentioned in this article.
