D E Shaw, the large hedge fund founded by David Shaw, is an interesting study in that its positions are constantly changing. Rarely does it stand pat on any stock during a quarter. In the last quarter for example, out of the 4,058 positions in its portfolio at the end of the third quarter, there were additions, subtractions, or closures to 3,484 of those positions. There’s always something to be gained by looking through its portfolio as a result, at its unique and effective blend of both quantitative and qualitative analysis which contributes to the constant turnover. The most striking trend we notice among its top stocks at the end of 2014 is a big move into energy companies, which could indicate an expectation their analyses call for a rebound in oil prices in the relatively near term. Not only are its top three picks now energy stocks (with previous top pick Apple Inc. (NASDAQ:AAPL) tumbling to eighth), but its positions in several other prominent energy stocks were also increased.
Let’s start with Phillips 66 (NYSE:PSX), which D E Shaw has held since the company’s IPO back in the spring of 2012. It’s been a successful investment thus far for Shaw, as Phillips 66 has appreciated more than 110% since that launch. Shaw is clearly not through with the success just yet, as it increased its position to 13.81 million shares by the end of the fourth quarter, a 33% increase from the close of the previous quarter. That, coupled with a large sell off of Apple shares, propeled Phillips 66 to the top of his portfolio.
Phillips 66 (NYSE:PSX) is one of the few energy companies whose shares didn’t fizzle out during 2014, down just 4%, though they did fall more than 15% from an all-time high in early September through the end of the year. While the refining and midstream company’s revenue did tumble to $35.6 billion in the fourth quarter of 2014, from $43.8 billion, due to shrinking margins, earnings actually improved greatly, to $1.15 billion, or $2.05 per share, compared to $826 million, or $1.37 per share one year prior. The electrified marketing and specialties division accounted for a good chunk of those gains, posting earnings of $367 million last quarter, compared to $105 million during the same year-ago period.
Outstanding governance has other investors like Warren Buffett and Dan Loeb also taking notice. Buffett, who sold the entirety of his massive Exxon Mobil Corporation (NYSE:XOM) stake in the fourth quarter, added 6% to his Phillips 66 (NYSE:PSX) position during the same period, increasing it to 6.57 million shares. Loeb meanwhile opened a new 5.0 million share position during the fourth quarter, his largest new investment. Phillips 66 is up 10.63% year-to-date.
Second in D E Shaw’s portfolio in terms of value is Marathon Petroleum Corp (NYSE:MPC). This is another energy stock that weathered 2014 well, actually posting a gain of just over 1% on the year, though it was a rocky, volatile ride. And like Phillips 66, it’s also enjoying a strong run so far in 2015, up 16.42%. This is more good news for the fund, which increased its Marathon Petroleum position by 38% last quarter, to 10.03 million shares.
Like Phillips, Marathon Petroleum Corp (NYSE:MPC) is also a refining company, for whom a drop in crude is not nearly as disastrous as other energy companies, as crude is their main input cost. While spreads between crude and gasoline have narrowed slightly, that didn’t stop Marathon from posting earnings of $798 million, or $2.86 per share, for the fourth quarter, a 27.5% increase from a year ago.
Alan Fournier’s Pennant Capital Management and Israel Englander’s Millennium Management both added to their positions in Marathon last quarter, building them by 11% and 19% respectively, to 3.06 million shares and 2.57 million shares.