Billionaire T. Boone Pickens’ High Upside Potential Picks

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While the trailing P/E multiple is a useful value metric, it does not take a company’s future growth prospects into account. If investors don't mind incorporating a little more uncertainty into their analysis, they can also consider the PEG ratio, which is based on the P/E multiple and on analyst expectations for future earnings growth and is, therefore, a way to measure a stock’s upside potential.

We track quarterly 13F filings from hundreds of hedge funds and other notable investors, including billionaire T. Boone Pickens (a former oilman who now manages BP Capital). These filings can be used to develop investing strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and we also like to screen individual filings according to a number of criteria. Here are our thoughts on Pickens’ five largest holdings as of the end of March in stocks with five-year PEG ratios less than 1 (or see the full list of his stock picks).

Downstream oil & gas

Oil and gas refining and marketing company Tesoro (NYSE: TSO), which has more than doubled in the last year, was one of the largest new holdings in Pickens’ portfolio during Q1. Tesoro trades at 10 times trailing earnings, and with Wall Street analysts expecting net income to increase over the next several years, the stock’s five-year PEG ratio comes in at 0.80. We would note that while earnings increased strongly in the first quarter of 2013 versus a year earlier, revenue was up only 3% though of course, the stock is priced cheaply as it is.

BP Capital was also buying Marathon Petroleum (NYSE: MPC), which was spun out of Marathon Oil to manage the company’s refining and marketing assets and is currently up about 90% after becoming publicly traded. As with Tesoro -- and, frankly, many other companies in the industry -- Marathon Petroleum is priced in value territory with both the trailing and forward earnings multiples being only 7. At that valuation, the company would look quite attractive as long as it could prove itself capable of maintaining its current business.

Another downstream oil and gas company which Pickens liked was Phillips 66 (NYSE: PSX) with the filing disclosing a position of about 80,000 shares. Phillips 66 is how Warren Buffett has been playing a refining and marketing thesis, as Berkshire Hathaway had nearly $2 billion invested in the company according to its own 13F (find Buffett's favorite stocks). The company is valued at 8 times earnings, whether we compare its stock price to trailing results or to analyst consensus for 2014. While earnings doubled in its last quarter compared to Q1 2012, revenue was actually down 10%.

Two other picks

Pickens cut his stake in Anadarko Petroleum (NYSE: APC), but still owned 45,000 shares as per the filing. The independent oil and gas company experienced a steep drop in net income in its most recent quarter compared to the same period in the previous year, but analysts apparently expect it to rebound: the forward P/E is 16, with the five-year PEG ratio being 0.90. It is the case that Anadarko delivered an increase in sales over the same time frame, but we still think that we would avoid the stock for now.

Rounding out our list of Pickens’ high upside potential picks is oil and gas exploration and production company Halcon Resources (NASDAQ: RAM). Halcon’s adjusted earnings numbers have been very low on a trailing basis, but analysts expect them to improve to $0.31 per share this year and $0.64 per share in 2014. That makes for a forward P/E of 9, and looking at further projections, the result is a PEG ratio well below 1. However, the stock is down 41% in the last year and the most recent data shows that 16% of the float is held short.


Halcon, therefore, seems like a risky pick at least at this time, and we might want to hold off until we see how much progress the company is making towards hitting analyst targets. The downstream oil and gas companies are certainly cheap in earnings terms, and we’d be quite interested in learning more about them in search of good value prospects with at least some growth potential as well.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in PSX. The Motley Fool has no position in any of the stocks mentioned. 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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