By: Jake Mann
Unlike many of his peers operating in the hedge fund industry, T. Boone Pickens holds a relatively concentrated equity portfolio, hovering between 18 and 23 stocks depending on the quarter. Our research has shown that historically it makes quite a bit of sense to track the best picks of the best hedge fund managers (see why here), and Pickens easily qualifies as a member of the smart money's elite. Without further ado, let's take a look at Pickens' favorite five stock picks from the fourth quarter, courtesy of his latest 13F filing with the SEC.
Valero Energy (VLO) was Pickens' No. 1 equity holding at the end of the third quarter, and three months later, the hedge fund manager's high level of conviction remains. Valero gained 7.7% in Q4 alone last year, and was up a massive 62% for the entire year. The key bullish thesis behind this energy giant is its topographical diversity in addition to its sheer size - Valero (including its subsidiaries) is the world's largest independent refiner and marketer. Despite its superb appreciation, shares of Valero still trade at a mere 8.1 times forward earnings and 0.2 times sales, indicating that there's more potential on the horizon, particularly for value investors.
Southwestern Energy (SWN), meanwhile, sits at the No. 2 spot in Pickens' portfolio, after seeing its share count stay essentially flat last quarter. This natural gas and oil E&P was a new position for the hedge fund manager in the second quarter of last year, and Pickens upped his stake by 17% in Q3. Southwestern Energy now comprises a little more than one-tenth of the hedgie's 13F capital, though shares have been flat year-to-date and are actually down 4.3% since the start of Q4.
For those who are optimistic on this company, it will have to live up to its Marcellus potential, because the stock isn't particularly cheap at 19.8 times forward earnings and 3.6 times book. Still, other key hedge fund managers joining Pickens in Southwestern include Israel Englander and Ken Griffin, so there's some support here.
Range Resources (RRC) sat outside Pickens' top five at the end of Q3, but the hedgie upped his stake in the diversified energy company by 63% last quarter. Of the 34 Wall Street analysts that currently track this stock, 19 hold "Buy" or "Overweight" ratings and none are bearish. This group's average price target represents a 5-6% upside from current levels, and shares have already risen 15.4% year-to-date.
A natural gas rebound will continue to help Mr. Market's sentiment of Range, and as it has been mentioned on our site before, the company "has plenty of potential, with extensive low-cost production capacity in the Marcellus shale play" in addition to areas in the Mississippian, Permian and Utica regions.
Anadarko Petroleum (APC) and Pioneer Natural Resources (PXD) come in 4th and 5th in Pickens' latest 13F filing, despite the fact that he decreased his stake in both last quarter. Pioneer, which Pickens downsized by almost 40%, saw a much bigger cut than Anadarko's drop of just 400 or so shares. Still, these moves just look like profit-taking at its finest. Both stocks are up by double-digit percentage points since the start of 2013, and each presents a solid momentum play moving forward.
On average, Anadarko and Pioneer saw similar bottom line declination over the past half-decade, seeing their earnings shrink by about 10% a year during this time. Looking ahead, however, the sell-side expects the latter to experience EPS growth of 20-21% a year through 2017, while Anadarko's growth prospects lie at about half this mark.
Like Range Resources, this duo operates in an obviously bullish macroeconomic environment, and it's difficult to argue with the track record and pedigree of T. Boone Pickens. With results like this, it's always important to pay attention to the smart money's sentiment, and Pickens is in the crème de la crème of the group.