The Top Stock Picks From D E Shaw’s $68 Billion Portfolio

D E Shaw is a renowned New York-based quant hedge fund founded by computer scientist and computational biochemist David E. Shaw in 1988. Mr. Shaw holds a Ph.D. from Stanford University and was a faculty member of the Computer Science Department at Columbia University until 1986. Before starting D E Shaw, Mr. Shaw worked on computational finance at Morgan Stanley. Although Mr. Shaw still remains involved in certain higher-level strategic decisions that affect the investment management business of the firm, he is no longer associated with the day-to-day operations of it and devotes a majority of his time to being the chief scientist of D. E. Shaw Research. D E Shaw recently submitted its 13F for the reporting quarter ending September 30, which revealed that the fund’s U.S equity portfolio at the end of September was worth almost $68 billion. The filing also revealed that during the July-to-September period, D E Shaw’s equity portfolio had a turnover of 24.31% and the fund’s top ten equity holdings accounted for 9.75% of the value of its portfolio at the end of September. Since D E Shaw is one of the best-known quant hedge funds on the Street, in the course of this article we will be focusing on the top five stocks on which the fund was betting on going into the fourth quarter.

Professional investors like David E. Shaw spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned 102% and beaten the market by more than 53 percentage points since the end of August 2012 (see the details).

#5 Gilead Sciences, Inc. (NASDAQ:GILD)

 – Shares Owned by D E Shaw (as of September 30): 6.15 Million

 – Value of Holding (as of September 30): $603.97 Million

Although shares of Gilead Sciences, Inc. (NASDAQ:GILD) have cooled off considerably from their highs at the end of June, they are still trading up by 13% year-to-date. During the third quarter, when the stock of the company went down by 15.8%, D E Shaw increased its stake in Gilead Sciences, Inc. (NASDAQ:GILD) by 40%. Apart from D E Shaw, several other hedge funds also increased their stakes or initiated new position in Gilead during the July-to-September period, which we discussed in a recent post. On November 12 the company announced that it has won major label expansion approval for its hepatitis C virus (HCV) drug, ‘Harvoni’. Analysts believe that this approval will help the company further solidify its dominant position in the HCV treatment space. For the third quarter Gilead reported EPS of $3.22 on revenue of $8.30 billion, beating analysts’ expectations of EPS of $2.87 on revenue of $7.84 billion. After D E Shaw, Cliff Asness‘ AQR Capital Management, with ownership of almost 4.77 million shares, was the largest shareholder of the company at the end of September among the funds tracked by us.

#4 Tesoro Corporation (NYSE:TSO)

– Shares Owned by D E Shaw (as of September 30): 6.79 Million

– Value of Holding (as of September 30): $660 Million

Petroleum refining and marketing company Tesoro Corporation (NYSE:TSO) has been one of the best performing oil and gas sector stocks this year, with its shares trading up by almost 54% year-to-date. It seems D E Shaw adopted the philosophy of adding to both his losers and his winners, as the firm purchased an additional 123,115 shares of the company during the July-to-September period. On November 12, Tesoro Logistics LP (NYSE:TLLP) announced that it has completed its $500 million acquisition of crude oil and refined product storage and pipeline assets in Los Angeles, California that were owned by the subsidiaries of Tesoro Corporation (NYSE:TSO). On October 28, Tesoro Corporation (NYSE:TSO) reported its third quarter financial results, declaring EPS of $6.48 on revenue of $7.74 billion. Analysts had expected the company to report EPS of $6.02 on revenue of $7.10 billion. David Greenspan‘s Slate Path Capital reduced its stake in Tesoro Corporation by 9% to 2.26 million shares during the July-to-September period.

#3 Berkshire Hathaway Inc. (NYSE:BRK.B)

 – Shares Owned by D E Shaw (as of September 30): 5.7 Million

 – Value of Holding (as of September 30): $742.9 Million

Moving on, the stock of Berkshire Hathaway Inc. (NYSE:BRK.B) has suffered a steady decline this year and currently trades with year-to-date losses of 9%. The third quarter was considerably volatile for a resilient stock like Berkshire Hathaway Inc. (NYSE:BRK.B), which might have been the reason why D E Shaw trimmed its stake in the company by 3% during that period. On November 6 the company reported fantastic third quarter earnings, owing mostly to the $4.4 billion profit it realized from the completion of the Kraft Foods/H.J Heinz merger deal. Whereas Berkshire Hathaway Inc. (NYSE:BRK.B)’s revenue for the quarter at $58.99 billion was slightly below analysts’ estimates of $61.12 billion, its operating earnings of $2,769 per class A share were above estimates of $2,760.20. On November 10, analysts at Nomura reiterated their ‘Buy’ rating on the stock. Boykin Curry‘s Eagle Capital Management increased its stake in Berkshire Hathaway Inc. by 9% to slightly above 11.24 million shares during the third quarter.

#2 Phillips 66 (NYSE:PSX)

 – Shares Owned by D E Shaw (as of September 30): 9.94 Million

 – Value of Holding (as of September 30): $763.53 Million

D E Shaw reduced its stake in its former largest equity holding, Phillips 66 (NYSE:PSX) by 14% during the third quarter, relegating the company to the second spot in its equity portfolio at the end of September. After remaining range-bound throughout most of 2015, shares of Phillips 66 (NYSE:PSX) have undergone a significant rally in the last two months and currently trade with year-to-date gains of 27.81%. On October 23 the company announced that its Vice President of Investor Relations, Kevin Mitchell, will become the executive vice president of finance and CFO on January 1. Analysts at Deutsche Bank reiterated their ‘Hold’ rating on the stock on November 10, but upped their price target on it to $102 from $100. Wayne Cooperman‘s Cobalt Capital Management reduced its stake in the company by 26% to 313,381 shares during the third quarter.

#1 Marathon Petroleum Corp (NYSE:MPC)

 – Shares Owned by D E Shaw (as of September 30): 21.35 Million

 – Value of Holding (as of September 30): $34.59 Million

Finally, after increasing its stake in Marathon Petroleum Corp (NYSE:MPC) by 2,118% during the second quarter, D E Shaw again upped its stake in the company, by 27% during the third quarter. Shares of Marathon Petroleum Corp (NYSE:MPC) made a U-shaped recovery in the period between August and October and currently trade up by 24% year-to-date. On November 17, Marathon Petroleum Corp announced that in connection with its pipeline subsidiary MPLX LP (NYSE:MPLX)’s acquisition of MarkWest Energy Partners, L.P. (NYSE:MWE), it has agreed to further increase the amount of the one-time cash consideration payable to MarkWest common shareholders to $6.20 per unit. Phill Gross and Robert Atchinson‘s Adage Capital Management was one of the hedge funds that initiated a stake in the company during the third quarter; it held 1.58 million shares of the company as of September 30.

Disclosure: None