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Were Hedge Funds Right Betting On These Energy Stocks?

The energy sector was unarguably one of the worst performing during the second half of the last year. Owing to the decline in crude oil prices, most energy stocks plunged and extended their losses into the first month of 2016. The previous round of 13F filings also showed a decline of popularity of energy companies among hedge funds and other institutional investors, but a few stocks managed to keep the investors interested, due to their strong balance sheets, which allows them to stay afloat in periods of turmoil and even maintain dividend payments. In this article we are going to take a closer look at five energy stocks that ranked as the most popular among the funds we track and will see if smart money investors made the right call betting on them.

An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like a hedge fund can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests, whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012 (read the details here).

#5 EOG Resources Inc (NYSE:EOG)

-Hedge Funds with Long Positions (as of September 30): 60

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $1.54 billion

Exploration and drilling company EOG Resources Inc (NYSE:EOG)’s stock did try to buck the trend by moving up in October, but the gradual decline it suffered during November and December caused it to end the fourth quarter down by 2.76%, while during the full 2015 it lost 25%. The company saw its popularity among hedge funds climb up during the third quarter as three more funds covered by Insider Monkey become bullish on the company during that period.

Although the decline of oil prices has led to several analysts and industry experts to reduce their outlook on exploration and drilling industry, EOG Resources Inc (NYSE:EOG) is among the few energy stocks that currently sports a ‘Buy’ rating from the majority of analysts who cover it.

At a recent industry conference, the company elaborated on how its high density wells at the Eagle Ford shale, which use more sand, are delivering more output than those of its competitors. For the third quarter of fiscal 2015, the company managed to beat analysts’ expectations by declaring EPS of $0.02, compared to an expected loss of $0.30. Even after reducing its stake in the company by more than half to 2.67 million shares during the third quarter, Ken Griffin‘s Citadel Investment Group remained the largest shareholder of EOG Resources among the funds tracked by us at the end of September.

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