Best Energy Stocks To Buy Now (And Two To Avoid)

The low-price commodity environment has propelled many companies to undergo cost-cutting efforts so as to manage their survival. Even though most energy companies are still living to tell the tale, their stock performance has definitely disappointed. The oil market has been challenged by swelling inventories, and it appears that there is not enough demand to trim down the bountiful supply, nor is there expected to be in the near-term. Shah Capital Management, launched by Himanshu H. Shah in 2005, disclosed four energy stocks via its 13F filing for the June quarter. However, the boutique investment firm sold-off two of its energy-related positions during the third quarter. The two companies in question are represented by Peabody Energy Corporation (NYSE:BTU) and Trina Solar Limited (ADR) (NYSE:TSL). Even so, Shah Capital believes in the future prospects of the other two energy stocks, which will be discussed in more detail later on in this article.

Let’s first take a step back and analyze how tracking hedge funds can help an everyday investor. Through our research we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month on average between 1999 and 2012. On the other hand the most popular large-cap picks of hedge funds underperformed the same index by seven basis points per month during the same period. This is likely a surprise to many investors, who think of small-caps as risky, unpredictable stocks and put more faith (and money) in large-cap stocks. In forward tests since August 2012 these top small-cap stocks beat the market by an impressive 53 percentage points, returning 102% (read the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Let’s kick off our discussion by examining Shah Capital’s move on Peabody Energy Corporation (NYSE:BTU). The investment firm added a 2.76 million-share position in Peabody Energy during the second quarter, but got rid of this entire position during the third quarter. The shares of the coal giant have delivered a disastrous performance this year, declining by more than 78% since the beginning of 2015. It is quite clear what stands behind this disappointing figure. Firstly, the Clean Power Plan that requires U.S power plants to significantly reduce carbon dioxide emissions has put a huge weight on the coal industry. Secondly, China’s economic slowdown is not helping the industry either. Even so, the stock received a great deal of attention from the hedge fund industry during the second quarter, as the number of top money managers invested in the company increased to 27 from 19 quarter-over-quarter. However, the value of their investments decreased to $142.06 million from $225.96 million during the three-month period. Balyasny Asset Management, founded by Dmitry Balyasny, represents one of the largest equity holders of Peabody Energy Corporation (NYSE:BTU) within our database, holding 18.40 million shares.

Prior to proceeding to Shah Capital Management’s potential soon-to-be energy outperformers, we will discuss its former position in Trina Solar Limited (ADR) (NYSE:TSL) as well. The boutique investment firm sold-off its 383,100 share-stake in the solar stock during the third quarter. However, this does not have anything to do with the solar industry overall, considering that Himanshu Shah boosted his position in another solar stock that will be discussed later on. Despite riding a downtrend since late-June, the shares of Trina Solar are still 11% in the green year-to-date. Some analysts believe that most solar stocks have been hurt by the mass selling being conducted by energy-focused funds. This Chinese solar stock also received some attention from the hedge fund industry during the June quarter. 24 hedge funds tracked by Insider Monkey had positions in Trina Solar at the end of the second quarter and amassed 28.50% of its outstanding shares, compared with 20 registered in the prior quarter. The value of the money poured into the stock increased to $304.78 million from $270.71 million. Kerr Neilson’s Platinum Asset Management is the top stockholder of Trina Solar Limited (ADR) (NYSE:TSL) among these hedge funds, with 11.10 million shares.

Let’s now turn our full attention to the other two energy stocks, which Himanshu H. Shah has put his faith in.

Shah Capital Management added 1.23 million shares to its position in ReneSola Ltd. (ADR) (NYSE:SOL) during the third quarter, which is now comprised of 4.71 million shares valued at $4.58 million as of September 30. The world has been gradually shifting toward renewables in an attempt to reduce carbon emissions, and this solar stock is definitely set to benefit from this development. ReneSola Ltd. (ADR) (NYSE:SOL) has been refocusing its strategy on downstream projects and services over the past year or so, and the company’s management believes that the market undervalues its growth potential, the abilities of its management team, and its financial position. In the meantime, there were only four hedge funds monitored by our team with stakes in the company at the end of the second quarter, compared to three registered in the previous one. However, the value of these stakes decreased to $62.71 million from $139.59 million quarter-over-quarter. Jonathan Barrett and Paul Segal’s Luminus Management acquired a 451,607-share stake in ReneSola Ltd. (ADR) (NYSE:SOL) during the second quarter.

Most importantly, Shah Capital increased its stake in Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) by 1.20 million shares during the third quarter to 1.96 million shares valued at $8.51 million. Earlier this week, the integrated energy company did not make any bids on the Brazilian government’s auction of exploratory oil blocks, which does not suggest confidence in the future prospects of the company. The shares of Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) have lost 22% since the beginning of the year, but it appears that they are rebounding at the moment. In the meantime, the energy stock lost some of its charm during the second quarter within the hedge fund community, as the number of hedge funds that we track which were invested in the stock decreased to 31 from 35 quarter-over-quarter. Nevertheless, the value of their positions increased to $760.56 million from $737.10 million over the same time span. Ken Fisher’s Fisher Asset Management is among the largest shareholders of Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) within our database, owning 8.54 million shares as of June 30.

Disclosure: None