Why Does This 17.8 Billion Dollar Fund Love This Energy Stock?

International Value Advisers, managed by Charles De Vaulx, is a New York-based fund with an estimated $17.8 billion in assets under management. The majority of International Value’s capital lies in its Diversified Global Strategy fund, which prides itself on a “flexible, go anywhere approach” to investing. Since its inception in 2008, the Diversified Global Strategy fund has achieved a 6.6% gross return per annum, with fees ranging between 0.9 to 1.5 percentage points. In addition to its adaptable strategy, De Vaulx has a penchant for the value-based teachings of Benjamin Graham and David Dodd, and places a special importance on cash flow valuation. Without further ado, here is the hedge fund manager’s top stock pick, as of his second quarter 13F filing with the SEC.

Devon Energy Corp

Devon Energy Corporation (NYSE:DVN) : Accounting for 6.2% of De Vaulx’s 13F portfolio, Devon Energy Corporation has been a decent investment this summer, returning 5.4% over the past three months. Between the first and second quarter, De Vaulx’s fund increased its ownership of Devon Energy by an estimated 6%, and its total holdings in the natural gas producer are now worth more than $312 million.

International Value’s position in Devon Energy is the largest among the 400 funds we are tracking, with no other fund holding more than $275 million worth of the stock. Famed investors Jim Simons and Steven Cohen are also bullish, holding roughly $120 million in Devon Energy shares between them.

Devon Energy currently trades at a Price-to-Cash Flow multiple (3.5X) below its industry’s average (5.9X) and its own 5-year historical average (5.7X). This valuation is also below many of the company’s competitors including: Apache Corporation (NYSE:APA) at 96.7X, Anadarko Petroleum Corporation (NYSE:APC) at 13.0X, Chesapeake Energy Corporation (NYSE:CHK) at 12.8X, EOG Resources, Inc. (NYSE:EOG) at 109.4X, and EnCana Corporation (NYSE:ECA) at 8.8X.

In fact, over the past half-decade, Devon Energy’s cash hoard has traditionally traded at a 37% discount relative to the S&P 500. This year, though, it is trading at a much cheaper 62% discount.

Delving a bit deeper into Devon’s cash flows, it appears that this undervaluation is not warranted, as the energy company has grown its operating cash flow by an average rate of 7.9% a year since the recession. This 3-year average growth rate is better than many of the company’s peers, most notably Anadarko Petroleum (-5.3%), Chesapeake Energy (3.7%), and EnCana (-17.9%). When this growth is factored into our valuation calculations, we can see that Devon Energy sports a PCFG ratio – which is similar to the PEG – of 0.44; typically any figure below 1.0 signals undervaluation. Moreover, Devon’s PCFG is trading at a discount to many of its peers who are cash flow growth positive, including: Apache (2.11), Chesapeake Energy (3.46), and EOG Resources (7.74).

Finally, Devon Energy also provides investors with a solid dividend yield of 1.3%, and a supportable payout ratio of 12.4%. This yield is above the likes of Apache (0.8%), Anadarko (0.5%), EOG Resources (0.6%), while trailing only Chesapeake Energy and EnCana, which have dividend yields of 1.8% and 3.6%, respectively.

As mentioned above, Charles De Vaulx loves this stock, and is Devon Energy’s biggest bull in the hedge fund industry. Due to the company’s reasonable cash flow valuation and attractive growth history, it’s easy to understand why. It may be smart for individual investors to consider Devon in their portfolios, as it usually is a good idea to mimic the world’s most successful money managers.

For a longer look at the entire hedge fund industry’s sentiment toward Devon Energy, continue reading here.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!