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Friday, February 21, 2014 - 14:30
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Friday, February 21, 2014 - 14:30

America's Top Fund Managers Are All Buying This Cheap Sector

Friday, February 21, 2014 - 2:30pm

Every quarter, we take a close look at the latest buys and sells from leading hedge fund managers. These "gurus" often commit millions of dollars to their favorite stocks. But they rarely show any broad predilection for any particular industry or sector.

Yet many of the recent filings by these gurus show deep interest in just one group of companies: our nation's energy refiners.

These firms, which distill crude oil into gasoline, diesel and other petrochemicals, are emerging from a long slump as a rising output of U.S. oil enables them to generate higher processing volumes.

I discussed the renaissance in energy refining back in August, and since then, the performance of the group has been mixed:

The divergent performances are due to regional positioning, as firms with Gulf Coast refineries have benefited from the elimination of a major supply bottleneck at a key storage hub in Oklahoma that has impacted underlying oil prices. Some firms have also suffered from unforeseen maintenance outages that led to sharp (though temporary) temporary dividend cuts.

Despite their pullbacks since August, I remain a fan of CVR Refining (Nasdaq: CVRR), which I profiled in November, as well as Alon USA Partners (Nasdaq: ALDW).

What about the gurus? Well many of them are clearly focused on one of the sector's biggest players, Marathon Petroleum (NYSE: MPC). In recent days, these gurus have taken the following actions:

• Caxton Associates initiated a new 674,000-share position (Caxton also bought 1.4 million shares of rival Valero Energy (NYSE: VLO) and 833,000 shares of Phillips 66 (NYSE: PSX)).
• Eton Park's Eric Mindich bought more shares in MPC in the fourth quarter, and now owns more than 2 million shares.
• Pennant Capital's Alan Fournier recently established a new 1.7 million-share position in MPC.
• Blue Ridge Capital's John Griffin just launched a new 2.9 million-share stake in MPC.

In addition to Caxton's investment in Valero,

• Viking Global's Andreas Halvorson nearly doubled his stake in that refiner to 16 million shares.
• Renaissance Technologies' Jim Simons also initiated a new 1.9 million-share position in VLO.
• Tiger Management's Julian Robertson also just started with a 500,000-share stake in Valero.
• Passport Capital's John Burbank had built a new 950,000-share position in VLO while boosting his stake in MPC to 600,000 shares.

All of these fund managers are focusing on Valero and Marathon Petroleum as they are among the most liquid stocks in the group, with $27 billion and $26 million in market values, respectively.

Merrill Lynch's Doug Leggate has contrasted the prospects of these two rivals and concluded that "Valero remains our favored refiner for Gulf Coast exposure." He also thinks the recent launch of a captive master limited partnership (MLP), Valero Energy Partners (NYSE: VLP) may unlock between $5 to $9 in upside for the parent company as that stake is further monetized in coming quarters.

Risks to Consider: The biggest risk to U.S. refiners would be a lifting of a ban on crude oil exports from the U.S. As analysts at UBS note, "The congestion of crude oil within the U.S. has provided unprecedented feedstock cost advantages for refiners relative to global peers." Though hearings have recently been held on the matter, few expect the ban to be lifted anytime soon.

Action to Take --> These hedge fund managers correctly note that these refiners are capable of prodigious cash flow, robust dividend growth, and in some instances, significant share buybacks. (Back in December, I took note of MPC's ongoing buyback program.)

These hedge fund managers also like that these refiners, with their high rate of capital expenditures, have a wide moat around their businesses. Lastly, expectations for further gains in U.S. crude oil output means that these refiners will be producing ever-higher volumes.

P.S. Want to know how to beat the performance of legendary "gurus" like George Soros, Carl Icahn... or even Warren Buffett? It's possible -- with a new system from StreetAuthority's Michael J. Carr that leverages the holdings of nearly two dozen top-tier investors. For more information, click here now.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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