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Hedge funds are better than ordinary investors in picking stocks. They employ experienced professionals and devote significant resources in researching markets and stocks. Sometimes they even get their hands on material non-public information and trade on such information. Though such trades are prohibited, there are still certain hedge funds that operate in the grey area. Our research found that imitating hedge funds’ most popular stock picks beat the market by 2 percentage points annually.

Below we compiled a list of energy stocks that hedge funds are most bullish on. The data is gathered from Goldman Sachs’ hedge funds report and show holdings as of September 30, 2011.

Company

Ticker

No. of HFs

%of Equity Cap owned by HFs

Anadarko Petroleum

(NYSE:APC)

20

3

Exxon Mobil Corp

(NYSE:XOM)

18

1

BP Plc Ads

(NYSE:BP)

16

2

Sunoco Inc

(NYSE:SUN)

14

24

Chesapeake Energy

(NYSE:CHK)

13

5

Hess Corp

(NYSE:HES)

13

5

Ensco Plc Ads

(NYSE:ESV)

13

15

Occidental Petroleum

(NYSE:OXY)

13

1

The most popular energy stock among hedge funds at the end of the third quarter was Anadarko Petroleum Corp (APC). According to Goldman Sachs, there are 20 hedge funds that had APC among their top 10 positions at the end of September. For example, John Paulson’s Paulson & Co invested nearly $900 million in this stock. Ken Fisher was also bullish about APC. His Fisher Asset Management had over $300 million invested in the stock. Three percent of the equity of Anadarko Petroleum was owned by hedge funds. APC has a market cap of $41B and lost about 5% so far this year.

Exxon Mobil Corp (XOM) is also very popular among hedge funds. There are 18 hedge funds bullish on this stock, including Ken Fisher’s Fisher Asset Management, Phill Gross and Robert Atchinson’s Adage Capital Management and D. E. Shaw. One percent of Exxon Mobil’s equity was owned by hedge funds. XOM has a market cap of $386B, a P/E ratio of 9.69, and returned about 4% so far this year.

Sunoco Inc (SUN) has the largest percentage of its equity owned by hedge funds. Hedge funds own 24% of Sunoco’s outstanding shares. SUN has a market cap of $4.2B and lost 10% so far this year. It was held by 14 hedge funds as of September 30. Leon Cooperman’s Omega Advisors had almost $100 million invested in SUN. Dan Loeb, Barry Rosenstein, and many other hedge fund managers were also bullish about SUN.

A large percent of Ensco Plc (ESV)’s equity was also owned by hedge funds. As of September 30, fifteen percent of the equity of Ensco was in the hands of thirteen hedge funds. For instance, David Einhorn’s Greenlight Capital had $187 million invested in ESV. ESV has a market cap of $12B and a P/E ratio of 18.31. It lost around 9% so far this year.

Other energy stocks that are popular among hedge funds include BP Plc (BP), Chesapeake Energy Corp (CHK), Hess Corp (HES) and Occidental Petroleum Corp (OXY). We like BP, CHK, and HES because of their low valuation multiples. Energy stocks provide inflation protection and they are still in a long-term bull market. The demand for oil has been increasing in emerging markets and the supply of oil isn’t changing much. That’s why we expect energy prices to go up over the next few years.

Disclosure: I am long CHK.

Source: 8 Most Popular Energy Stocks Among Hedge Funds