- Soros Fund, Perry Capital, and Third Point all added to their positions in YPF last quarter.
- Following the smart money makes sense, as the smart money has done due diligence and can put a bid under the company.
- Given its huge reserves and cheap valuation, YPF is a solid company even without the smart money.
A lot of smart money is flowing into YPF (NYSE:YPF) right now. Soros Fund more than doubled his stake in the Argentine energy company last quarter, bringing up total holdings to 13.7 million shares. Both Perry Corp and Third Point also increased their holdings in the company as well.
Given the flow of smart money into YPF, does following the smart money into YPF make sense?
Following the smart money into a security does have its positives.
For one, smart money typically does the due diligence necessary to make sure that the reported financials are what the companies say they are. There is less probability of nasty surprises.
Smart money can also change sentiment for the better.
The best example of this phenomena is Warren Buffett and his deals with Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS). Because Buffett had the trust of other investors, Buffett's investments in Goldman Sachs and Bank of America gave the two financial companies enough confidence from the marketplace to survive during the financial crisis and sovereign debt crisis. This made investing in Goldman Sachs and Bank of America safer for other investors.
Similarly, if Soros Fund establishes a position in a stock, sentiment in a stock will tick up simply because of George Soros' impressive track record. Improving sentiment is arguably occurring to YPF now, as the stock has held up relatively well in the wake of Argentina's default.
The downside is also arguably reduced because the smart money has established a position. If YPF falls below $30, the smart money may accumulate even more shares, thus placing a bid under the stock.
Following the smart money does have its negatives.
One negative is that the smart money doesn't have to tell the public if they've hedged their positions. The smart money could be long, but their exposure could be a lot less than what the public believes.
Furthermore, the smart money doesn't have to tell the public when they've sold until the 13F's come out. By the time the public finds out, the smart money could have already reduced their position substantially.
These cons may not apply to YPF, however, as it seems that YPF is a long term holding for Soros Fund. (given the large size of the position)
YPF Is Compelling Based On Its Own Merits
With or without the smart money, YPF is compelling based on its own merits.
YPF is trading at a fairly cheap valuation, with a forward PE of only 10. Furthermore, YPF's production and proved reserves are increasing at a healthy pace. Combined oil and gas production increased around 1.7% in 2013, and should increase further this year. Proved reserves are increasing at a faster rate, with YPF liquid reserves increasing 6.4% in 2013 and natural gas reserves increasing 17%.
The trend of increasing proved reserves and rising production should continue as YPF works with more and more international oil partners to develop its resources. YPF is already working with Chevron in Vaca Muerta, and on August 28th, YPF announced that it will also work with Malaysia's Petronas in Vaca Meurta as well. The Petronas deal includes approximately $500 million in initial investment and could amount to up to $9 billion over the next decade. That extra investment should increase YPF's production and reserves further, as well as add to YPF's top and bottom lines.
Production and profits could increase even more after 2015, as President Kirchner's term ends and a more market friendly leader possibly takes charge.
Given the fact that Argentina has the world's second largest technically recoverable natural shale gas reserves, YPF has plenty of growth ahead of it. Even with all the geopolitical risks, YPF is a solid long term investment.