These Energy Stocks May Be Down But Hedge Funds Don’t Think They’re Out

Sunedison Inc (NYSE:SUNE) is down by 7.30% and 23.40% since Friday, while Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has rebounded from a morning dip to sit at level for the day, but is still down by 11.18% over the past five trading days. Let’s take a closer look at why the two energy stocks are having a rough time of late and see how the best money managers in the world view these two sputtering 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.

Sunedison Inc (NYSE:SUNE) is down due to weak crude prices. Solar is correlated with crude and crude prices are below $50 per barrel because Saudi Arabia is determined to flush non-OPEC producers out of the market. Crude prices fell more than 3% yesterday and are flat today. The market continues to have doubts on Sunedison’s liquidity despite the fact that the solar company has added hundreds of millions of dollars in additional liquidity of late.

In contrast to the market, hedge funds are bullish on Sunedison Inc (NYSE:SUNE). Within our database of around 730 funds, 93 were long Sunedison Inc (NYSE:SUNE) at the end of June, down just one fund from the end of March. The total value of these hedge funds’ holdings increased to $5.68 billion, up by $1.24 billion from the prior quarter. Hedge funds also held 69.1% of Sunedison’s common shares, making it the stock which hedge funds we track were hoarding shares of the most. Among the hedge funds that increased their positions in the second quarter were Dan Loeb’s Third Point, which upped its holding by 24% to 12.4 million shares, and Dan Sobol and Lisa Hess’ Skytop Capital Management, which increased its stake by 20% to 516,702 shares. David Einhorn‘s Greenlight Capital decreased its position by 1% but still had 24.84 million shares at the end of the second quarter.

Like Sunedison, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is down because crude is down. Petrobras depends on crude for the majority of its revenue and needs higher crude prices to service its $90 billion in dollar denominated debt, which could become a big problem if Brazil’s currency continues to depreciate. Shares of the company are down by 44% year-to-date and are close to their 52-week low. Although Petrobras cut its five-year capital expenditure budget by 40%, the market is not satisfied and is looking for more cuts.

Hedge funds are still optimistic on Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The total number of hedge funds long Petrobras declined to 31 from 35 but the aggregate value of their holdings increased to $760 million at the end of June from $737 million at the end of March. Doug Silverman and Alexander Klabin‘s Senator Investment Group pared its position by 3% to 20.0 million shares while David Halpert’s Prince Street Capital Management established a new position of 1.97 million shares.

Given that crude prices can’t stay low indefinitely, we’re bullish on the two stocks despite their declines. The short run may still be a little painful, but the long run could make for quite a comeback story.

Disclosure: None