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Boston-based mutual fund powerhouse Fidelity Investments with $1.5 trillion in assets under management, including $555 billion in 13-F assets per its latest March 2012 quarter filing with the SEC last Wednesday, is one of the largest institutional investors, accounting for about 3% of the total market capitalization of the U.S. equity markets. Its investment in the basic materials and energy sectors alone amounts to over $100 billion, more than the entire 13-F assets of most natural resources focused institutional investors.

Fidelity holds over 2,900 positions in its 13-F portfolio, with positions in most mid- to large- as well as many small-cap basic materials and energy companies. Hence, we focused our efforts on analyzing the equity holdings in its Q1 2012 13-F to determine its highest conviction bets by sector, 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 also projected based on consensus analyst estimates to have strong revenue and earnings growth going forward (see Table):

Royal Gold Inc. (RGLD): RGLD is engaged in the acquisition and management of precious metal royalties, seeking to acquire existing royalties or to finance projects that are in production or near production in exchange for royalty interests. Fidelity added $80 million in Q1 to its $144 million prior quarter position. Besides Fidelity, another leading institution that made a large bullish bet on RGLD in Q1 was Gabelli Funds, headed by award winning money manager Mario Gabelli, that added 0.3 million shares in Q1 to its 0.3 million share prior quarter position.

RGLD reported its Q3 (March) the week before last, on Thursday, with revenues in-line and missing analyst earnings estimates (42c v/s 44c). Its shares currently trade at 27 forward P/E and 2.1 P/B compared to averages of 10.6 and 2.6 for its peers in the gold mining group, while earnings are projected to rise at strong 33.0% annual rate from $1.29 in 2011 to $2.28 in 2013. Also, revenue is projected to rise at a strong 23.2% annual rate from $216 million in 2011 to $328 million in 2013.

Pioneer Natural Resources (PXD): PXD is engaged in the exploration and production oil and gas in the U.S. and South Africa. Fidelity added $145 million in Q1 to its $236 million prior quarter position, making it the largest institutional holder of PXD. Besides Fidelity, another leading institution that made a large bullish bet on PXD in Q1 was Boston-based MFS Investment Management, that added 0.4 million shares to its 0.1 million share prior quarter position.

PXD reported its Q1 (March) the week before last, on Wednesday, beating analyst revenue estimates by a huge margin ($883 million v/s $742 million), and also beating earnings ($1.23 v/s $1.22). The next day, FBR Capital raised the target to $140. However, its shares, that have been stellar performers, rising to 10-fold since the depths of the 2008-09 meltdown, dipped down post-report by about 12% in sympathy with the rest of the energy group. At 13-14 forward P/E and 2.3 P/B, the stock currently trades at a discount to averages of 15.6 and 5.2 for its peers in the oil and gas exploration and production group, while earnings are projected to more than double from $3.75 in 2011 to $7.53 in 2013, at an annual growth rate of 41.7%. Also, revenue is projected to rise at a strong 22.5% annual rate from $2.78 billion in 2011 to $4.18 billion in 2013.

The following are additional basic materials & energy companies that Fidelity is bullish about, accumulating shares in them in Q1 2012 (see Table):

  • National Oilwell Varco (NOV), engaged in the manufacture and sale of equipment, components and products used in oil and gas drilling and production, in which it added $356 million in Q1 to its $976 million prior quarter position;
  • Murphy Oil Corp. (MUR), engaged in the exploration, production, refining and marketing of oil and gas in the U.S. and U.K., in which it added $150 million in Q1 to its $10 million prior quarter position; and
  • Cheniere Energy Inc. (LNG), an operator of LNG receiving terminals and natural gas pipelines in the Gulf Coast of the U.S., including the Sabine Pass LNG terminal, in which it added a new $131 million position in Q1.

The following are Fidelity's high conviction bearish picks in the basic materials and energy sectors, based on its Q1 selling activity (see Table):

  • Baker Hughes Inc. (BHI), that provides wellbore products and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the global oil and natural gas industry, in which it cut $471 million in Q1 from its $645 million prior quarter position;
  • Barrick Gold Corporation (ABX), a Canadian company engaged in production of gold and copper in Peru, Canada, U.S., Australia, Chile, and five other countries, in which it cut $385 million in Q1 from its $1.49 billion prior quarter position;
  • Halliburton Company (HAL), that provides a variety of equipment, and maintenance, engineering and construction services to the oil and gas exploration and production (E&P) industry, including reservoir completion and drilling services, in which it cut $374 million in Q1 from its $1.45 billion prior quarter position;
  • Goldcorp Inc. (GG), a Canadian company engaged in mining and exploration of silver, copper and gold throughout North and South America, in which it cut $308 million in Q1 from its $1.90 billion prior quarter position;
  • Newmont Mining Corp. (NEM), that produces gold in the U.S., Australia, Peru, Indonesia, Canada, New Zealand, Ghana and Mexico, in which it cut $285 million in Q1 from its $1.05 billion prior quarter position;
  • Talisman Energy (TLM), that is a Canadian company engaged in oil, natural gas liquids and natural gas exploration and production internationally, in which it cut $262 million in Q1 from its $433 million prior quarter position;
  • Alpha Natural Resources (ANR), engaged in the production, sale, and processing of coal from mines and preparation plants in VA, WV, KY and PA, in which it cut $209 million in Q1 from its $334 million prior quarter position; and
  • Southwestern Energy Co. (SWN), engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA, with almost 100% of its estimated proved reserves being natural gas, in which it cut $104 million in Q1 from its $162 million prior quarter position.

Table

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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: Q1 2012 Fidelity's $555B Filing: Top High-Growth Conviction Buys And Sells In Basic Materials And Energy