MPLX LP (NYSE:MPLX) revealed Monday that it has agreed to buy Markwest Energy Partners LP (NYSE:MWE) in a $15.8 billion deal. The transaction values Markwest at about $20 billion since MPLX will also assume $4.2 billion in debt. According to the terms of the agreement, which have been unanimously approved by the boards of the two companies, MarkWest shareholders will get 1.09 shares of MPLX plus a $3.37 cash payment per share of MWE, for a total consideration of $78.64 per share, representing a 32% premium to MarkWest’s closing price of $59.75 per share on Friday, July 10. When the deal is closed, MarkWest will become a wholly-owned subsidiary of MPLX. The merger is expected to create the fourth-largest master limited partnership in the country, with a market capitalization of $21 billion. Shares of MPLX LP (NYSE:MPLX) slumped as low as $59.98 in early morning trading, or down over 13% from their closing price of $69 on Friday. Markwest Energy Partners LP (NYSE:MWE)’s shares, on the other hand, soared to as high as $74.96 per share in pre-market trading, or 25.41% above their $59.77 closing price on Friday, though they currently stand at just $66.09, up by 10.57%, and well below the purchase price.
The decline in MPLX LP (NYSE:MPLX)’s share price is opposite to the smart money’s bullish stance on the company by the end of March. Heading into the second quarter, a total of ten of the hedge funds tracked by Insider Monkey held long positions in this stock, down 9% from the fourth quarter. This may make investors do a double take, believing this is a bearish signal. However, the total value of their holdings increased by 20.78% to $569.12 million by March 31 from $471.19 million on December 31, even as the stock had a nominal drop of 0.31% in the first quarter. The fact that hedge funds grew their MPLX holdings overall is a clear bullish sign.
But first, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to 55% for the S&P 500 (see the details).
Insider Monkey also tracks insider moves in companies such as MPLX to see whether executives inside these companies are confident in these firms’ shares. However, there have been no recorded purchases or sales of shares by insiders so far this year.
Considering all of this, we’re going to appraise the recent smart money activity regarding MPLX LP.
