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Heavy buying by major funds, coupled with significant stock price outperformance, is a likely indicator of strong institutional interest in a company-- either because of improving fundamentals or deep undervaluation. The following is a list of top outperforming stocks which BlackRock’s fund bought last quarter. As compared with S&P’s gains of 5.62% since the last quarter's end, these stocks have shown significant outperformance, posting gains between 8.50% to 30.64%

Stock

Symbol

Shares Held - 06/30/2011

Shares Held - 09/30/2011

Change in shares

Price Change Since Sept.30

Marathon Oil Corporation

MRO

5990624

8265261

2274637

23.83%

Lyondellbasell Industries NV

LYB

510070

2339163

1829093

19.66%

Marathon Petroleum Corporation

MPC

0

1555569

1555569

21.94 %

General Dynamics Corp.

GD

1507731

2126195

618464

9.14%

Conocophillips

COP

6488734

6891079

402345

8.50%

National Oilwell Varco Inc.

NOV

1353451

1775734

422283

30.64%

Occidental Petroleum Corporation

OXY

3107082

3352345

245263

21.67%

Source: 13F filing

My favourite long candidate among the above list is Lyondellbasell Industries NV. I beleive the stock will continue to see further upside going forward. LyondellBasell Industries NV is a Netherlands-based company engaged in the chemical industry. The Company products are divided into four sections: Olefins and Polyefins, Intermediates and Derivatives, Refining and Oxyfuels and Technology. It produces polypropylene and polypropylene compounds, propylene oxide, polyethylene, ethylene and propylene. It is also a producer of refined products, including biofuels.

LyondellBasell Industries is well positioned to benefit from inexpensive, natural gas-linked ethane feedstock, greater feedstock flexibility, and operational improvements. Trading at ~5x 2013E EBITDA with a 16% 2013E FCF yield, the stock provides an attractive risk-reward. Another interesting thing to note is that the company is trading at 15% below replacement cost, despite many companies actively considering large-scale greenfield projects that would take many years to complete.

Lyondell recently paid a special dividend of $4.50 per share to shareholders on 25 November 2011. In addition to the special dividend, Lyondell’s board authorized an increase in the company’s quarterly dividend payout from $0.20 to $0.25, which means ~ 3% yield at current price.

One stock from the above list which I would like to avoid is General Dynamics (NYSE:GD). General Dynamics offers a portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding, and communications and information technology. General Dynamics' EPS forecast for the current year is 7.14 and next year is 7.57. According to the consensus estimates, its top line is expected to grow 1.30% in the current year and 3.50% next year. It is trading at a forward P/E of 8.39. Out of 25 analysts covering the company, 17 are positive and have buy recommendations, one has a sell recommendation and seven have hold ratings.

I am bearish on General Dynamics because of a slowing defence budget, which will place a cap on the top-line growth for General Dynamics and the other defence primes. Given the dire state of Federal finances, I see this defence budget slowdown continuing for the next several years. In addition, General Dynamics’ business jet end market might also see a slowdown similar to what it had seen in 2008. Although valuation appears to be low, the company is unlikely to see much upside as defence remains an unloved sector among investors.

Source: BlackRock's Best Performing Top Buys