What Does Billionaire Steve Cohen’s SAC See In EQT Corporation (EQT)?

In May, billionaire Steve Cohen’s SAC Capital Advisors filed its 13F with the SEC, disclosing many of its long equity positions in U.S. stocks as of the end of Q1 2013. Even though the information in 13Fs is a bit old by the time it is released, we think there are still a few ways to make use of it. For one, we’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and think that more strategies are possible as well. We also like to go through filings from top managers to see what big changes they are making in their portfolios. SAC, it turns out, more than tripled the size of its position in energy company and utility EQT Corporation (NYSE:EQT) during Q1 to a total of 4.3 million shares, making it the fund’s largest single-stock 13F holding by market value (see more of Cohen’s stock picks).

The $12 billion market cap EQT Corporation (NYSE:EQT) produces natural gas, natural gas liquids, and oil in the Appalachian Basin; gathers and processes natural gas; and distributes gas to customers in the Appalachian region. The company’s most recent 10-Q shows a fairly even split in operating income among these three segments. Upstream and midstream activities provide 37% of operating income each, with downstream accounting for 26%. Significant improvement in operating income occurred in all three segments in the first quarter of 2013 versus a year earlier, with earnings rising by 52%.

Still, even if we annualize earnings per share figures from Q1 we get a fairly high P/E multiple (of 31), so markets have already accounted for significant future growth. Wall Street analysts are expecting continued growth, with the result being a forward P/E of 26. In other words, SAC would seem to be expecting EQT Corporation (NYSE:EQT) to outperform expectations going forward; it’s possible, for example, that Cohen and his team see the integrated natural gas-focused company as a pure-play investment in higher nat gas prices. Billionaire George Soros reported a position of 3.1 million shares in EQT as of the beginning of April (find Soros’s favorite stocks).

We’d compare EQT Corporation (NYSE:EQT) to a peer group consisting of natural gas focused E&P companies Chesapeake Energy Corporation (NYSE:CHK) and SandRidge Energy Inc. (NYSE:SD), integrated energy company Cabot Oil & Gas Corporation (NYSE:COG), and natural gas utility ONEOK, Inc. (NYSE:OKE). SandRidge Energy Inc. (NYSE:SD) is expected to be unprofitable both this year and next year- even as revenue has been up over 30%- as the company struggles in the low price environment. According to the most recent data, 15% of the float is held short and it certainly seems to speculative to buy at this time. Chesapeake Energy Corporation (NYSE:CHK) has been in a similar situation, but a string of asset sales has put it in a position where the sell-side is predicting $1.49 in EPS for this year. That implies a current-year earnings multiple of 15, with further upside beyond that point or in the event of a rise in prices, and so Chesapeake Energy Corporation (NYSE:CHK) might be a better way to play natural gas than EQT Corporation (NYSE:EQT).

Cabot has more than doubled in price over the last year, and while net income has also been up strongly this has resulted in some very high earnings multiples. Specifically, the stock trades at 28 times consensus earnings for 2014 and so Cabot Oil & Gas Corporation (NYSE:COG) might best be placed on a watch list to see if performance continues to be excellent. ONEOK, Inc. (NYSE:OKE) is actually priced at a premium valuation as well, with trailing and forward P/Es of 26 and 20 respectively; that seems aggressive from a value perspective, given that net income actually fell in its most recent quarter compared to the same period in the previous year. As a utility, ONEOK, Inc. (NYSE:OKE) pays a dividend yield of a little over 3%.

We’d avoid the stock on that basis, as we would with SandRidge Energy Inc. (NYSE:SD) and Cabot Oil & Gas Corporation (NYSE:COG) (at least until there are positive developments at those companies). EQT’s valuation seems a bit high as well- Chesapeake, even with its recent troubles, seems to be a better buy and surely any rise in natural gas prices (which EQT Corporation (NYSE:EQT) may actually be depending on in order to justify the current price) would benefit that company as well.

Disclosure: I own no shares of any stocks mentioned in this article.