5 Stocks With Huge Upside Potential From This Multi-Billion Dollar Hedge Fund

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Billionaire and founder of Citadel Investment Group – Ken Griffin – started out trading options in his college dorm room and now manages one of the largest hedge funds in the world. In reviewing Citadel’s most recent 13F filing, we have found five stocks that Griffin owns that can pop in the interim. These stocks have large upside potential, as determined by their long-term earnings growth expectations and current valuation, based on P/E ratios (check out Ken Griffin’s latest picks).

Qualcomm (NASDAQ: QCOM) has a PEG of 1.0 and also pays a modest dividend yielding 1.6%. At a trailing P/E of 18x and a forward P/E of only 13x, Qualcomm is one of the great growth and value stories in the semiconductor industry – especially when compared to major peers Broadcom (26x trailing P/E) and Texas Instruments (21x trailing P/E). The semiconductor company is expected to see revenues up 25% in FY2013 due to increased demand for high-end chips.

The long-term demand for Qualcomm’s chipsets, meanwhile, will be a strengthening economy that should drive an increase in consumer spending, notably on smartphones. What we believe is one of the under appreciated growth drivers is Qualcomm’s newest chipset, Snapdragon, which gives the chipmaker exposure to the popular iPhone model that Intel previously had a stranglehold on. Billionaire George Soros is one of this tech company’s big-name supporters (check out George Soros’ new picks).

Citadel increased its Aflac (NYSE: AFL) stake by 350% last quarter. This insurer has a dividend yielding 2.6% that is a payout of only 22% of earnings. Following the Japanese earthquake and tsunami, Aflac saw steep sales pressures due to the fact that over 70% of revenues are derived from the region. Sales are now expected to rebound in the high single digits from 2012 and 2013, with U.S. sales helping carry the company – up 5.2% year over year in 3Q.

From a valuation standpoint, Aflac is attractive with a PEG of 0.8 and trading at a mere 9x earnings. When looking at Aflac’s zero-debt balance sheet, strong dividend yield, and solid 5-year expected earnings CAGR (10%), it's easy to see why the company is one of Ken Griffin’s deep value-high upside picks.

GNC Holdings (NYSE: GNC) saw Citadel increase its stake in the vitamin and nutrition retailer by 80% in 3Q. GNC is the cheapest of Citadel’s five stocks listed here, trading at a PEG of only 0.7. This is due in part to the vitamin company’s industry-leading 5-year expected earnings CAGR of 22%. GNC trades – at a 16x P/E – well below top peer Vitamin Shoppe’s 29x earnings valuation. The specialty retailer is also cheap on a P/S basis, at 1.4x compared to Vitamin Shoppe’s 1.9x. Jim Simons is one of GNC’s key investors alongside Griffin (see Jim Simons’ latest picks).

The discount retailer Dollar General (NYSE: DG) recently posted 3Q results of $0.63, well above $0.50 for 3Q 2011. The beat was driven by same store stores growth of 4%, and 10% higher sales on a year over year basis. Dollar General was also recently added to the S&P 500, opening up the tradability and potential investor pool for the company.

We believe that even as the economy shows signs of strengthening, there will continue to be strong demand for Dollar General’s consumer staple and discount products. The retailer trades as one of the cheapest in the industry at 16x trailing earnings and only 13x forward earnings.

When its valuation is coupled with its aggressive expansion plans, Dollar General looks like a superb investment. The sell-side expects a 17% long-term EPS growth rate (annually). Trading at a PEG of 0.9, we see the upside to Dollar General outpacing its major peers Family Dollar and Dollar Tree, while also providing investors limited volatility with a beta of only 0.1.

EOG Resources (NYSE: EOG) is turning toward unconventional liquids to drive future growth, hoping to limit exposure to the gas market, including the transition to horizontal well oil assets from deepwater or Canadian oil sands. The oil and gas company is targeting 2012 production growth of 11%, compared to 9% growth in 2011. Sticking to its initiative to move toward a more liquid-based portfolio, EOG is targeting 40% oil growth by the end of this year.

We believe that investors are over-discounting the impact that this higher margin oil production will have on earnings, and so the energy company trades at only 20x forward EPS, while its long-term expected earnings growth rate is upwards of 22%.

In short, we believe that Citadel has well positioned its portfolio with a number of deep-discount picks that are poised for large upside moves. The likes of Qualcomm, Aflac and GNC provide investors this upside potential while also yielding income from dividends. Now, Dollar General and EOG do not pay any income via dividends, but do offer some of the better long-term growth prospects due to expansionary expectations.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services recommend Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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