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Brenham Capital Management and Brenner West Capital Partners Are Closing; Will These Stocks Drop?

Nina Zdinjak

Investing is much like gambling, and it seems that the fortune can’t stay with the same person for too long. Well, some ups and downs are expected and logical, but what happens when there are no more ups? This seems to be the recent story for many hedge funds who have been primarily investing in the energy sector including Brenham Capital Management and value investor Brenner West Capital Partners. With the Russell 2000 Energy Index losing 17% last year and 20% this year and the global benchmark Brent entering a bear market recently, what chance did these hedge funds have?

Starting with Brenham Capital Management, a Dallas-based hedge fund that mainly invests in small- and mid-cap companies from the energy sectors, which has been facing a tough few years. Last year through October, the fund lost 10.5% and in the same period this year, it was down 14.6%. To make things even worse, the trend continued and in October the fund lost 8.5%. The fund’s performance wasn’t always disappointing, since its inception (in 2012) until two years ago it was delivering some pretty amazing returns. Now, the fund is closing, and its manager and founder, John Labanowski, said following: "I continue to witness some truly bizarre stock action in the energy sector that is hard to for me to make sense of and I’m not sure the situation will improve. Arriving at this decision was gut-wrenching, but I believe it is the right thing to do. Brenham’s investment strategy isn’t working in this environment and I’m no longer willing to risk investor capital in such a setting.”

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Another thing that bothered John Labanowski was unpredictable OPEC (The Organization of the Petroleum Exporting Countries) behavior, and their “make it as you go policy” - referring to often and sudden changes in cutting and adding supply. For example, OPEC determined to cut production two years ago, but Saudi Arabia dictated a change this year, and production was unusually high. Paring this uncertain OPEC management with oil-market cycles who have become “shorter and more violent”, Brenham Capital Management’s investment strategy was just not up to the challenge.

Brenner West Capital Partners shared Brenham’s faith as it also sees no other way out, except shutting down. This is a New York-based hedge fund, launched in 2005, which had a strong return of 24% last year. It counted billionaire Bill Ackman among its investors. Considering last year’s gain, this year must have hit the fund hard, but unfortunately we weren’t able to obtain precise information about its current performance. Brenham’s and Brenner’s closures just followed the trend of many hedge funds in the past few months.

Since the funds are now selling all of their positions in order to return the money to its investors, we think it would be a good idea to take a look at their largest positions in the third quarter, as the prices of those stocks may decline because of the selling pressure.

Let’s take a look at the top five stocks in Brenham Capital Management’s equity portfolio in the third quarter.

The fund held the most valuable position in WPX Energy Inc (NYSE:WPX), counting 4.99 million shares worth around $100.4 million. Investors from Insider Monkey’s database have been bullish on this stock with the number of long investors climbing to 53 in the third quarter, from 40 in the previous quarter. The stock currently trades at $13.95. The second largest stake worth  $94.86 million on account of 6.69 million shares, the fund held in Oasis Petroleum Inc. (NYSE:OAS). This company has also seen an increase in enthusiasm from investors in our table, with the number of those long the stock being 33 on September 30, up by six from the previous quarter.

The rest of the top five Brenham’s third quarter stock include SM Energy Co (NYSE:SM), which trades at $18.78, Encana Corp (NYSE:ECA), with the stock price currently at $6.38, and Parsley Energy Inc (NYSE:PE), which trades at the moment of writing at $18.62. In Sm Energy Co, the fund reported holding, at the end of the third quarter, 2.79 million shares valued $87.97 million, in Encana Corp it had 6.37 million shares valued $83.58 million, whereas its fifth largest position (Parsley Energy) counted 2.6 million shares, worth $76.05 million.

It is time to reveal Brenner West Capital Partners’ top holdings in the third quarter.

Brenner West Capital Partners’ largest stake was in XPO Logistics Inc (NYSE:XPO), and it counted 669,119 shares, worth $76.39 million on September 30, occupying 9.49% of its equity portfolio. The number of smart money investors long XPO Logistics Inc dropped to 44 in the third quarter, from 47 in the second quarter of 2018. At the moment of writing, the stock trades at $69. IAC/InterActiveCorp (NASDAQ:IAC) was Brenner West Capital Partners’ second biggest position in the third quarter, and it counted 315,533 shares, valued $68.38 million. The hedge fund sentiment towards this stock remained the same in the recent period, hence on October 30 there were 51 hedge funds from our database bullish on this stock. Currently, the stock price is $176.93.

Remaining three most valuable positions in Brenner West Capital Partners’ portfolio at the end of the third quarter were in Darling Ingredients Inc (NYSE:DAR) that changes hands around $21.00, Ally Financial Inc (NYSE:ALLY), which currently trades at $24.43, and Orion Engineered Carbons SA (NYSE:OEC), with a stock price at the moment of writing being $25.73. As for the fund’s positions in these stocks, the largest one was in Darling Ingredients Inc, as it counted 3.43 million shares with a value of $66.19, followed by Ally Financial Inc in which the fund held 2.49 million shares, worth $65.77 million, and Orion Engineered Carbons SA whose 1.68 million shares valued $54.22 million the fund held at the end of the third quarter.

The time will tell if these stocks will be significantly affected by Brenham’s and Brenner’s closures, either way, the one thing is certain - hedge funds in the energy and oil stocks are currently struggling. We don’t want to give the wrong impression that hedge funds aren’t talented stock pickers. There are good as well as bad hedge fund managers and our proprietary methodologies try to identify the best and worst hedge fund managers and their best and worst stock picks. For example our latest list of best hedge fund stocks lost only 1.5% since November 15th vs. a loss of 3.3% for the S&P 500 ETF (SPY). Our latest list of the worst hedge fund stocks (which we recommended our subscribers to short) lost an average of 8.5% during the same period. So, our subscribers were able to beat the S&P 500 Index both on the long and short sides of their portfolios (read the details here).

Disclosure:None. This article is originally published at Insider Monkey.