Two Elite Money Managers Make Big Show Of Faith In This Struggling Energy Company

The recent broader market selloff has put significant downward pressure on the shares of Cheniere Energy Inc. (NYSEMKT:LNG), which have lost more than 23% over the past month. Billionaire investor Carl Icahn of Icahn Capital LP disclosed in a recently-amended 13D filing that he now has an ownership stake of 27.04 million shares in the liquefied natural gas (LNG) company, accounting for 11.43% of its outstanding common stock. This marks an increase of 7.69 million shares since Icahn initiated a position in Cheniere Energy in early-August. In addition to that, Stephen Mandel’s Lone Pine Capital LLC reported an ownership stake of 12.24 million shares in Cheniere through a 13G filing on the same day, which yields an uplift of nearly 4.30 million shares from the position it revealed in its 13F filing for the June quarter. The newly-disclosed stake represents 5.2% of the company’s shares.

Let’s now provide a brief introduction to the money managers mentioned above prior to diving into the analysis and discussion on Cheniere Energy. Carl Icahn, one of the richest men in the world, surely needs little to no introduction. He is widely-known as a high-class activist investor and a feared corporate raider who has shaken up numerous companies throughout his career. Moving on to the other investor, Lone Pine Capital is a Greenwich-based hedge fund established by Tiger Cub Stephen Mandel back in 1997. The investment firm primarily focuses on finding good businesses that trade at attractive valuations, a strategy that has turned out to be quite profitable over the years. As stated by the latest round of 13F filings, Lone Pine Capital manages an equity portfolio of $26.73 billion as of June 30.

Hedge funds and other big money managers like Icahn tend to have the largest amounts of their capital invested in large and mega-cap stocks like Apple Inc. (NASDAQ:AAPL) because these companies allow for much greater capital allocation. That’s why if we take a look at the most popular stocks among funds, we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by seven basis points per month, showing that their most popular picks and the ones that received the bulk of their capital were not actually their best picks. On the other hand, their top small-cap picks performed considerably better, outperforming the market by 95 basis points per month. This was confirmed through backtesting and in forward tests of our small-cap strategy since August 2012. The strategy, which involves imitating the 15 most popular small-cap picks among hedge funds has provided gains of more than 118%, beating the broader market by more than 60 percentage points over the last 36 months (see the details).

We will now turn our attention to Cheniere Energy Inc. (NYSEMKT:LNG), a Houston-based LNG company that owns and operates the Sabine Pass LNG terminal in Louisiana and the Corpus Christi LNG terminal in Texas. The Louisiana-based gas terminals were initially intended for the import of gas, but the shale revolution turned everything around. Cheniere Energy is set to be one of the nation’s first exporters of gas from the U.S shale formations. In the meantime, there were 76 hedge funds monitored by Insider Monkey that owned stakes in the company at the end of the second quarter, compared to 81 registered in the prior quarter. Even so, these hedge funds amassed roughly 55% of the company’s outstanding shares as of June 30. The value of hedge funds’ investments slightly declined quarter-over-quarter, sliding to $9.01 billion from $9.75 billion. Aside from the aforementioned shareholders, Seth Klarman’s Baupost Group also owns a sizable stake in Cheniere Energy, comprised of 15.37 million shares.

Cheniere Energy Inc. (NYSEMKT:LNG) has not generated any substantial revenues yet, as the first cargos of LNG are expected to be delivered in the fourth quarter of this year. Therefore, the intrinsic value of the company is primarily based on faith that Cheniere will become a gas export giant in the years ahead. However, the company has been facing challenges from the low price environment for liquified natural gas. LNG prices are somewhat interrelated with the prices of oil, and are anticipated to remain low for quite some time. The fast-increasing supply of LNG in the U.S and Australia coupled with China’s troubling economy have put downward pressure on LNG prices, which are expected to remain that way for the short-to-medium term. Despite facing these challenges and headwinds, Cheniere has been able to sign multiple long-term delivery contracts, which might explain the reason why the hedge fund industry is quite bullish on the stock. For instance, Cheniere Energy recently announced a freshly-signed deal to deliver up to 24 cargoes to Électricité de France S.A. from the Sabine Pass LNG terminal, from 2017 through 2018. As a result, the company is set to deliver up to 92 cargoes, or roughly 340 million MMBtus, to European and Asian customers through 2018.

Although it might take years until market participants can fully perceive the potential of Cheniere Energy, especially with regards to its earnings, the fact that so many top money managers are invested in the stock might suggest that the LNG company has great potential. Therefore, potential and current investors who consider pouring money into Cheniere Energy should ask themselves if there will be enough demand for LNG in the upcoming years in order to mitigate the current low price environment.

Disclosure: None