After witnessing a huge fall from over $100 in July of last year to the low-$40 range in the early part of 2015, crude prices saw a brief rally and stabilized in the $55-60 range during the second quarter. Although crude prices have slumped significantly since then, the relief rally in the second quarter led to a lot of hedge funds increasing their exposure to crude oil. Among them was billionaire David E. Shaw‘s hedge fund D E Shaw. According to the latest 13F filed by the fund for the reporting period of June 30, its U.S public equity portfolio was worth over $67 billion, with a significant portion of that being invested in oil refining companies. D E Shaw is a New York-based quantitative hedge fund founded by David E. Shaw, a Ph.D. from Stanford University, in 1988. Since its inception, the fund has focused on using a quantitative analysis approach to choosing its investments and is now considered a pioneer and arguably the most successful quant hedge fund in the world. Barring an 8% reduction in its stake in Phillips 66 (NYSE:PSX), D E Shaw increased its stake significantly in several of its other top oil refining stock picks during the second quarter, which included Marathon Petroleum Corp (NYSE:MPC), Valero Energy Corporation (NYSE:VLO), and Tesoro Corporation (NYSE:TSO). In this article we are going to take a closer look at these stocks.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
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Phillips 66 (NYSE:PSX) represented D E Shaw’s largest equity holding to close the second quarter. As mentioned earlier, the fund reduced its stake in the company by 8% during the quarter to bring its total holding down to slightly over 11.58 million shares. As of June 30, this stake was worth $933.11 million. Although shares of the company showed significant resilience during much of the year, in the past week they have taken a big hit owing to the steep drop in crude oil prices. For the second quarter of 2015, Phillips 66 (NYSE:PSX) reported EPS of $1.83, which came in better than the $1.81 figure analysts were expecting. Analysts at Barclays reiterated their ‘Overweight’ rating on the stock on August 3 and also upped their price target to $114 from $113, which represents a potential rise of over 60% from the stock’s current trading price. Apart from D E Shaw, activist investor Dan Loeb‘s Third Point also reduced its holding in Phillips 66 (NYSE:PSX) during the second quarter, by 19% to 3.25 million shares.
D E Shaw increased its stake in Marathon Petroleum Corp (NYSE:MPC) by 118% to slightly over 16.8 million shares during the April-June period. This stake was worth almost $880 million at the end of June. The Ohio-based oil refiner announced on August 20 that Tom Kaczynski will be joining the company as vice president of finance and treasurer from August 31. Marathon Petroleum Corp (NYSE:MPC) reported mixed quarterly earnings for the second quarter on July 30. EPS for the quarter came in at $1.51 on revenue of $20.54 billion, whereas analysts were expecting EPS of $1.76 on revenue of $19.29 billion. Analysts at JPMorgan Chase & Co. upgraded the stock to ‘Overweight’ from ‘Neutral’ on August 26, while keeping their price target at $61, which represents an almost 40% potential upside from where the stock currently trades at. D E Shaw was not the only hedge fund which more than doubled its position in Marathon Petroleum Corp (NYSE:MPC) during the April-June period; Cliff Asness‘ AQR Capital Management also increased its stake in the firm during the period, by 174% to over 7.0 million shares.
Moving on to Valero Energy Corporation (NYSE:VLO), which represented D E Shaw’s third-largest bet in the oil refining industry and its fifth-largest equity holding overall. The fund bought an additional 2.14 million shares of the company during the second quarter, and as of June 30 owned almost 11.6 million shares worth around $726 million. Valero Energy Corporation (NYSE:VLO) reported far better-than-expected second quarter numbers on July 30. While analysts were expecting the company to declare EPS of $2.42 on revenue of $19.91 billion for the quarter, it reported EPS of $2.66 on revenue of $25.12 billion. Nonetheless, analysts at Bank of America recently downgraded Valero Energy Corporation (NYSE:VLO) to ‘Underperform’ from ‘Neutral’ on August 24, though they increased their price target on the stock to $68 from $64, which represents a potential 17.85% increase from where the stock currently trades at. Among the hedge funds that reduced their stakes in Valero Energy Corporation (NYSE:VLO) during the April-June period was Robert Joseph Caruso‘s Select Equity Group, which reduced its holding by 8% to slightly above 2.22 million shares during that period.
D E Shaw increased its stake in Tesoro Corporation (NYSE:TSO) by 30% to over 6.66 million shares during the second quarter. As of June 30, this stake was worth $562.78 million. The company posted an earnings and revenue beat on August 5, following which its shares saw a 10% rise over the next few days. However, this rally was short-lived, as the fall in crude oil prices started weighing on the stock. While analysts were expecting Tesoro Corporation (NYSE:TSO) to report EPS of $4.02 on revenue of $6.80 billion for the second quarter, the company declared EPS of $4.59 on revenue of $8.23 billion. On August 14, analysts at Scotiabank reiterated their ‘Sector Perform’ rating on the stock, while increasing their price target to $114 from $111, which represents a potential 28.45% rise from the shares’ current price. Among the hedge funds we cover, Jonathan Auerbach‘s Hound Partners was the third-largest shareholder of Tesoro Corporation (NYSE:TSO) on June 30, owning over 3.83 million shares.
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