Stockpickr: Stocks Set for an Upside Surprise

I'm a big fan of stocks that, for whatever reason, Wall Street has forgotten about and that eventually drift down to the point where they are considered "cheap." By that, I mean that it's basically a no-brainer for another company (or a leveraged buyout firm) to try to buy the cheap company.

We set up a portfolio on Stockpickr to keep track of which stocks are most likely to surprise on the upside. This portfolio resides in our Today's Lists section and is usually updated every week. The criteria for this list are:

• The stock was down more than 10% in 2006.
• The price/earnings-to-growth (PEG) ratio must be less than 1. For example, if a company is trading at a 20 P/E and its growth rate is 10% per year, then its PEG is 2. In Jim Cramer's book Mad Money: Watch TV, Get Rich, he says he likes looking at stocks with a PEG of less than 2. In this particular Stockpickr portfolio, we are looking for an even greater extreme: a PEG of less than 1.
• Analysts are rating the stock a buy or strong buy. In other words, Wall Street hasn't completely given up on the stock, but investors haven't paid attention to the growth.

Additionally, I like to see that activist hedge funds are making major bets on the stock, even if the big mutual funds aren't -- yet. There are 15 stocks on the list. Here's a look at two that I like.

Drilling rig company Helmerich & PayneHP is ideally positioned for a turnaround. As investors grew more cautious on oil stocks, Helmerich & Payne felt the pain, slowly dropping throughout 2006 despite record gains in earnings. The stock has had an uptick recently, and I expect it to get back to the upper $30s within the next 12 months.

Helmerich & Payne (HP)