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 & Payne ( HP) 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)


Meanwhile, not only is Helmerich & Payne on our list of stocks most likely to surprise, it also ranks high in a Stockpickr portfolio called the Best Growth Stocks.

First on that list was EXFO Electro-Optical Engineering ( EXFO), with over 2,800% earnings growth. Helmerich & Payne had 125% earnings growth over the last year, and the company exceeded analyst expectations each quarter last year despite the stock consistently drifting down.

Now Helmerich & Payne is in buyout territory. Analysts expect the company to earn $3.76 per share in 2007, giving it a P/E ratio of slightly less than 7 at current prices.

The company has a great balance sheet, with $200 million in debt but over $500 million in cash flows. If anything, the company should borrow more and use the cash to buy back its own shares at these levels. That's probably why on Helmerich & Payne's Stockpickr page we can see that several other savvy investors own it.

For instance, Prince Al-Waleed, who bought up AOL shares and also made a huge investment in Citigroup ( C) in the early 1990s, has been steadily accumulating shares. The prince, given his relationship with Saudi Arabia, has a decent understanding of what's going on in oil, so it's interesting to see where he places his bets in that industry.

Here's a look at Prince Al-Waleed's holdings, via Stockpickr.

Another stock on the Most Likely to Surprise list that has also been under accumulation, according to Stockpickr, is energy production and engineering company Helix Energy Solutions ( HLX). The stock has slipped recently, along with the price of oil:


Helix Energy Solutions (HLX)


But analysts are still calling for $4.07 per share in earnings in 2007, giving it a P/E ratio of slightly more than 7, which puts it in takeover territory.

I'm not the only person who thinks that. Chapman Capital, one of my favorite activist funds, has been buying the stock. Bob Chapman, whom I've mentioned before, is notorious for the letters he fires off to management. He once told me that the night before he files one of these letters, he always gives the CEO a call and tells him, "Your life is about to change." Yesterday, Chapman fired off a letter to Cypress Semiconductor ( CY) demanding that the company put itself up for sale.

Check out Chapman's fully disclosed holdings and updates on his activist positions. Also, to be notified whenever his Stockpickr page is updated, just bookmark it by rating it with four stars. Check out the rest of the stocks on our Most Likely to Surprise list. Additionally, you might want to check out our Stocks Most Likely to Disappoint list.

Stockpickr tip of the day: I read a number of blogs every day in order to complete my daily Blog Watch column. It's hard to keep track of all the best financial blogs, particularly because many bloggers drop off the face of the earth after a few months of blogging. On the Stockpickr blog, I keep track of my 100 favorite financial blogs. I plan on updating that list soon, but if you click on the link above, what you'll see is current. Feel free to email me with any suggestions.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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