3 High-Yield Energy Stocks From A Value Guru
Not many authors can lay claim to writing a book that fetches nearly $3,000 for a new copy.
#-ad_banner-#Then again, not many authors have $1.3 billion in the bank either.
Seth Klarman, founder of Boston-based Baupost Group, has more than a few professional and philanthropic accomplishments to be proud of. His book, “Margin of Safety: Risk-Averse Investing Strategies for the Thoughtful Investor,” is a classic in the world of investing literature and has become one of the most expensive and hard-to-find books of its kind.
With about $26 billion in assets under management, Klarman generated positive returns last year that earned him $350 million. An in-depth scan of his current portfolio, outlined in his first-quarter Form 13F filing, has revealed some energy-focused high-yielders that are worth a closer look from growth and income investors alike.
| Alon USA Partners (NYSE: ALDW ) |
| Alon USA Partners (NYSE: ALDW) is the king of the hill in terms of dividend yield for Klarman’s portfolio, with a current annual yield of 14.6%. The downstream oil company markets its products in self-branded convenience stores primarily in southern U.S. states like Texas and Arizona. With a market cap just north of $1 billion, Alon is a smaller player among refiners. Its Texas-based refinery has an output of 70,000 barrels per day; in contrast, the world’s largest refinery (located in western India) has a capacity of nearly 18 times that. However, unplanned downtime last year led to an earnings loss for the third quarter, causing Alon to withhold a cash distribution — showing that its high yield isn’t written in stone. Positive earnings per share (EPS) in the past two quarters have prompted a return of the dividend, but if the yield looks attractive to you, you should be aware of the stock’s volatile history. |
| BP (NYSE: BP ) |
| Mega-cap BP (NYSE: BP) accounts for a healthy share of Baupost’s portfolio, with the firm’s investment valued near $150 million. However, Klarman cut his position almost in half last quarter, booking profits on the 17% rise in the stock’s price in 2013. BP has continued to perform well this year, up 6% while maintaining a respectable 4.5% dividend yield. BP is still very much in vogue with Wall Street analysts, earning upgrades from firms like RBC and Canaccord since April. Recent turmoil in Iraq has pushed crude prices up to nine-month highs, which would help BP’s upstream operations but could have poor implications in the long term. Keep the developments in the Middle East in mind when evaluating any new energy plays for your portfolio. |
| PBF Energy (NYSE: PBF ) |
| PBF Energy (NYSE: PBF) is another high-yielder of Baupost’s (paying out 4%), but it stands out to me because Klarman has more than doubled his stake over the past two quarters, boosting his position from 2 million shares to 5.4 million. PBF’s market cap of $2.1 billion is about twice that of Alon, but PBF’s assets have a throughput of about 540,000 barrels per day, 7.7 times that of Alon’s. The recent pop in crude prices will likely translate into higher stock prices for refiners, and positive earnings revisions should keep rolling in for PBF as well. Analysts at Cowen rank PBF Energy among the top five names in the industry, while Bank of America has declared a $35 price target, which represents 17% upside from current prices. |
Risks to Consider: Klarman’s 13F does not tell the whole story of his portfolio: He is known to use unconventional investing methods like holding more than half of his assets under management in cash and employing intricate derivatives. In addition, unfolding activity in Iraq will likely increase volatility for these and other energy stocks.
Action to Take –> Seth Klarman has earned his place aside value gurus like Warren Buffett, uncovering undervalued investing gems and holding positions for years at a time. However, while the yields and potential growth in these three energy stocks are attractive, the industry’s current geopolitical upheaval means you should do your own due diligence before investing in these stocks or the sector in general.
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