Billionaire T. Boone Pickens' Long-Term Stock Picks

 |  Includes: DVN, NOV, RIG, SD, VLO
by: Insider Monkey

By Matt Doiron

T. Boone Pickens became a billionaire through success in the oilfield, and now manages both his own wealth and that of outside investors in BP Capital. We track the fund's quarterly 13F filings in our database, as well as those of other hedge funds and notable investors, as part of our work developing investment strategies; we have found, for example, that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year (see the details here). Information from the most recent 13Fs may be considered a little old by some investors, but we can also find stocks which Pickens has owned each of the last four quarters in order to provide initial ideas for further research. Here are the five largest holdings by market value from the end of December that Pickens owned in each quarter of 2012 (or see the most recent 13F from BP Capital):

The fund's largest position was its roughly 350,000 shares of Valero (NYSE:VLO), a $23 billion market cap petroleum products refiner and marketer. Refining stocks have generally been doing well recently, and Valero's stock price has risen 67% in the last year. Even after the increases in price, the industry tends to carry low earnings multiples and Valero is in line with its peers there as well: the trailing and forward P/Es are 11 and 7 respectively. The company is quite sensitive to macro conditions, as shown by the fact that its beta is 2.1.

Pickens has also owned National Oilwell Varco (NYSE:NOV) in each of its last four quarterly reports. The oil and gas equipment and services company experienced a 17% decline in earnings in the first quarter of 2013 versus a year earlier, although its revenue did increase by 23%. National Oilwell Varco also looks like a potential value stock: according to forecasts from Wall Street analysts, the current market cap represents a forward earnings multiple of 10 and a five-year PEG ratio of 0.8. We'd be interested in learning more about the company and comparing it with Halliburton and Schlumberger.

Devon Energy (NYSE:DVN) has been another of Pickens' long-term stock picks with the most recent filing disclosing ownership of about 120,000 shares. Devon is an oil and gas exploration and production company with interests in energy plays across North America. Special items caused the company to be unprofitable in 2012, and revenue was actually down 11% in its last quarterly report compared to the fourth quarter of 2011. The sell-side is looking for a rebound however, with Devon's market capitalization of $22 billion placing it at 11 times consensus earnings for 2014.

According to the 13F, Pickens had about 110,000 shares of Transocean (NYSE:RIG) in his portfolio at the beginning of this year. Billionaire activist Carl Icahn has taken a large position in Transocean, claiming that the Board of Directors has done a poor job representing shareholder interests and that the drilling contractor should return more cash to shareholders. Find Icahn's favorite stocks. Analyst expectations are optimistic on Transocean as well as these other companies; in fact, the five-year PEG ratio is 0.4 showing that they expect strong earnings growth over the next several years.

The fund trimmed its stake in troubled natural gas producer Sandridge (NYSE:SD) by 14% between October and December, but still closed 2012 with about 610,000 shares. Sandridge hasn't been as profitable an investment for Pickens recently, down 36% in the last year as low natural gas prices have prevented the company from fully capitalizing on its aggressive development plan. It is expected to be unprofitable both this year and next year, and the most recent data shows that 17% of the float is held short. Activist shareholders have gained some ground in terms of changes at the company, but we still think that we would avoid the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.