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Established in 1984, Los Angeles-based Kayne Anderson Capital Advisors currently manages over $15.2 billion in investments, including $8.85 billion in 13-F assets at the end of Q1 2012 (based on the 13-F filed with the SEC last week), an increase from the $8.25 billion in 13-F assets at the end of prior quarter. The firm employs fundamental bottom-up research to identify its investments, focusing on niche asset classes that are less understood and generally not followed by the broader investor community.

The portfolio is moderately diversified into 165 positions, with almost two-thirds of its investments in the energy sector, another 10% in utilities, another 10% in basic materials, and the remaining 15% or so across other sectors. Also, a quarter of its 13-F assets are deployed in large-caps, another half in mid-caps and the remaining quarter is in small-cap equities.

We analyzed Kayne Anderson's equity holdings in its Q1 2012 13-F to determine its highest conviction bets (see Table), selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are its high conviction bullish positions in the basic materials and energy sectors that are undervalued compared to their peers in the group, with the first one being a position in which the stock is surging and the second one in a stock that is plunging (see Table):

Williams Companies (NYSE:WMB): WMB is an energy infrastructure company that owns and operating approximately 13,700 miles of natural gas pipeline system in the U.S. Kayne Anderson is gradually building up its position in WMB, adding $104 million in Q1 to its $179 million prior quarter position, in addition to the $48 million we reported that it added in the prior quarter. Other major institutions that made major bullish moves, added to their WMB positions in Q1, included Boston-based MFS Investment Management, with over $265 billion in assets under management, that added a new 7.5 million share position in Q1, and Morgan Stanley that added 2.6 million shares in Q1 to its 4.3 million share prior quarter position.

WMB shares have been surging this year, up about 17% YTD and almost doubling at its high about two weeks ago from the lows last fall. Its shares trade at 19-20 forward P/E and 10.0 P/B compared with averages of 23.7 and 2.7 for its peers in the oil & gas transportation & pipeline group.

Chesapeake Midstream Partners LP (CHKM): CKHM is an MLP principally focused on natural gas gathering, providing gathering, treating and compression services to its primary customer, corporate parent Chesapeake Energy Corp. (NYSE:CHK). Kayne Anderson added $42 million in Q1 to its $45 million prior quarter position. Another major institution that added to their CHKM positions in Q1, included energy infrastructure MLP-focused Tortoise Capital Advisors, with $7.0 billion in assets under management, adding 0.4 million shares to its 6.0 million share prior quarter position.

CHKM shares have plunged lower over the last month, down almost 20% during that period, in concert with the plunge in shares of its corporate parent CHK. Its shares currently trade at 14-15 forward P/E and 1.4 P/B compared with averages of 19.1 and 2.6 for its peers in the oil & gas pipelines group.

The following are additional companies that Kayne Anderson is bullish about, accumulating shares in them in Q1 2012 (see Table):

  • Markwest Energy Partners (NYSE:MWE), that is a MLP engaged in the gathering, compression, treating, processing and transportation of natural gas in the U.S., in which it added $58 million in Q1 to its $336 million prior quarter position;
  • Spectra Energy Corp. (NYSE:SE), that is engaged in the gathering, processing, transmission, storage and distribution of natural gas in the U.S. and Canada, in which it added $26 million in Q1 to its $26 million prior quarter position;
  • Kirby Corp. (NYSE:KEX), engaged in inland and offshore marine transportation, and the overhaul and repair of diesel engines and related parts, in which it added $19 million in Q1 to its $1 million prior quarter position; and
  • Pengrowth Energy Corp. (NYSE:PGH), a Canadian energy trust with crude oil and natural gas properties in Western Canadian Sedimentary Basin, and offshore along the east coast of Canada, in which it added $6 million in Q1 to its $2 million prior quarter position.

The following are Kayne Anderson's high conviction bearish picks, based on its Q1 selling activity (see Table):

  • Teekay Tankers Ltd. (NYSE:TNK), a Marshall Islands corporation formed to provide international marine transportation of crude oil, in which it cut out completely its $29 million prior quarter position;
  • Crosstex Energy LP (XTEX), that is a MLP engaged in gathering, transmitting, treating, and processing of natural gas and natural gas liquids in the U.S., in which it cut $26 million in Q1 from its $35 million prior quarter position;
  • Copano Energy LLC (NASDAQ:CPNO), that provides midstream energy services via a single 23-mile pipeline, to natural gas producers in the South Texas and Gulf Coast regions, in which it cut $13 million in Q1 from its $60 million prior quarter position;
  • Arch Coal Inc. (NYSE:ACI), that is engaged in the production of steam and metallurgical coal from surface and underground mines, in which it cut out almost completely its $2 million prior quarter position; and
  • Enerplus Corp. (NYSE:ERF): ERF is an independent oil & gas producer, with property interests located in western Canada, as well as in the U.S. in MT, ND, PA, MD and DE, in which it cut $2 million in Q1 from its $12 million prior quarter position.

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Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: Kayne Anderson's Q1 2012 Energy-Focused $8.8B Filing: Top Undervalued High Conviction Buys And Sells