Billionaire Leon Cooperman’s High Upside Potential Picks
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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:
One of the fund’s largest holdings by market value was its holding of 16 million shares of SLM (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 (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, 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 (NYSE: RIG) was another of Cooperman’s stock picks with 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 times 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. It has a high trailing earnings multiple of 27 times. 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 (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 revenue, 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.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Express Scripts and NYSE Euronext. The Motley Fool owns shares of Express Scripts and Transocean. 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!