International Value Advisers, managed by Charles De Vaulx, is a New York-based hedge 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 Corporation (NYSE:DVN)
Accounting for 6.2% of De Vaulx’s 13F portfolio, Devon Energy Corporation has been 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.
In the hedge fund industry, International Value’s position in Devon Energy is the largest of its kind, 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.
As is consistent with the strategies of these various hedge fund managers, most notably Charles De Vaulx, 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’s never a bad 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.