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).

Pickens 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).