Billionaire Israel Englander’s Cheap Stock Picks Include Phillips 66 (PSX)

The fund owned almost 6 million shares of McDermott International (NYSE:MDR), a $2.1 billion market cap company which is focused on providing design and construction services in offshore oilfields. Its valuation gives it trailing and forward P/Es of 13 and 10, respectively, as again the sell-side forecasts that the company will recover from recent conditions which caused its earnings to fall considerably from their levels a year ago (even as sales increased). The stock is down 11% in the last year against a rising market, and 11% of the float is held short.

Englander included Phillips 66 (NYSE:PSX) as well as Marathon Petroleum as cheap refining and marketing companies in his portfolio. Phillips 66 (NYSE:PSX) trades at 9 times forward earnings estimates, and while the company’s revenue did decline considerably in the first quarter of 2013 versus a year earlier this was made up for by cost cutting with the result being a doubling of net income. Warren Buffett is a big fan of Phillips 66 (NYSE:PSX): his Berkshire Hathaway reported a position of more than 27 million shares in the stock as of the end of March (find Buffett’s favorite stocks).

We think that refining and marketing looks like a rich hunting ground for value investors, and we’d include both Phillips 66 (NYSE:PSX) and Marathon as well as their peers in that category. We’re more cautious of Lyondellbasell, and of the oil and gas equipment and services companies: their multiples are certainly in value territory, but recent business performance has not been particularly strong. We wouldn’t rule them out, and in particular we do think that the chemical industry is worth investigating, but they do not seem as attractive at this time.

Disclosure: I own no shares of any stocks mentioned in this article.