After witnessing a huge fall from over $100 in July of last year to the low-$40 range in the early part of 2015, crude prices saw a brief rally and stabilized in the $55-60 range during the second quarter. Although crude prices have slumped significantly since then, the relief rally in the second quarter led to a lot of hedge funds increasing their exposure to crude oil. Among them was billionaire David E. Shaw‘s hedge fund D E Shaw. According to the latest 13F filed by the fund for the reporting period of June 30, its U.S public equity portfolio was worth over $67 billion, with a significant portion of that being invested in oil refining companies. D E Shaw is a New York-based quantitative hedge fund founded by David E. Shaw, a Ph.D. from Stanford University, in 1988. Since its inception, the fund has focused on using a quantitative analysis approach to choosing its investments and is now considered a pioneer and arguably the most successful quant hedge fund in the world. Barring an 8% reduction in its stake in Phillips 66 (NYSE:PSX), D E Shaw increased its stake significantly in several of its other top oil refining stock picks during the second quarter, which included Marathon Petroleum Corp (NYSE:MPC), Valero Energy Corporation (NYSE:VLO), and Tesoro Corporation (NYSE:TSO). In this article we are going to take a closer look at these stocks.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Phillips 66 (NYSE:PSX) represented D E Shaw’s largest equity holding to close the second quarter. As mentioned earlier, the fund reduced its stake in the company by 8% during the quarter to bring its total holding down to slightly over 11.58 million shares. As of June 30, this stake was worth $933.11 million. Although shares of the company showed significant resilience during much of the year, in the past week they have taken a big hit owing to the steep drop in crude oil prices. For the second quarter of 2015, Phillips 66 (NYSE:PSX) reported EPS of $1.83, which came in better than the $1.81 figure analysts were expecting. Analysts at Barclays reiterated their ‘Overweight’ rating on the stock on August 3 and also upped their price target to $114 from $113, which represents a potential rise of over 60% from the stock’s current trading price. Apart from D E Shaw, activist investor Dan Loeb‘s Third Point also reduced its holding in Phillips 66 (NYSE:PSX) during the second quarter, by 19% to 3.25 million shares.
D E Shaw increased its stake in Marathon Petroleum Corp (NYSE:MPC) by 118% to slightly over 16.8 million shares during the April-June period. This stake was worth almost $880 million at the end of June. The Ohio-based oil refiner announced on August 20 that Tom Kaczynski will be joining the company as vice president of finance and treasurer from August 31. Marathon Petroleum Corp (NYSE:MPC) reported mixed quarterly earnings for the second quarter on July 30. EPS for the quarter came in at $1.51 on revenue of $20.54 billion, whereas analysts were expecting EPS of $1.76 on revenue of $19.29 billion. Analysts at JPMorgan Chase & Co. upgraded the stock to ‘Overweight’ from ‘Neutral’ on August 26, while keeping their price target at $61, which represents an almost 40% potential upside from where the stock currently trades at. D E Shaw was not the only hedge fund which more than doubled its position in Marathon Petroleum Corp (NYSE:MPC) during the April-June period; Cliff Asness‘ AQR Capital Management also increased its stake in the firm during the period, by 174% to over 7.0 million shares.