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Hedge Funds' Best Picks Show the Way for 2012


The energy sector saw plenty of hedge fund activity and it's no wonder why. Through Nov. 10, energy stocks in the S&P 500 are up 3.7% this year, the fourth-best performer of the 10 sectors. In November, energy stocks are up 1.4%, the top gaining sector of the entire S&P 500. This performance comes as crude oil prices have surged from about $80 per barrel in October to more than $100.

This upward move in crude prices and energy stocks has likely benefitted a handful of hedge fund managers, assuming they continue to hold shares of oil stocks. David Tepper with Appaloosa Management, Carl Icahn, Harbinger Capital's Phil Falcone, Baupost Group's Seth Klarman and SAC Capital's Steven Cohen all upped their exposure to energy stocks during the third quarter,

It hasn't all been about the recent jump in the price of oil, though. In the third quarter, the energy sector as a whole saw earnings growth of 52%, the highest of any other sector during the quarter and by a wide margin, according to FactSet Research analyst John Butters. In addition, earnings for energy companies in the S&P 500 should climb another 4% in 2012 based on analysts' estimates.

Among the favored picks, both Tepper and Klarman picked up shares of BP (BP - Get Report), the British oil giant still recovering from the April 2010 Gulf oil spill. Cohen's picks in the energy sector were recent spinoff Marathon Petroleum (MPC) and HollyFrontier (HFC), the latter of which was also a favorite of Tepper. Icahn's only energy buy was on the soon-to-be-acquired El Paso (EP), while Falcone picked up shares of Exco Resources, an oil and natural gas exploration company.

Interestingly, those fund managers who reduced their exposure to the energy sector -- notably Sandell Asset Management, Tudor Investment and Moore Capital -- sold shares of Exco Resources. The stock is down more than 38% this year, so perhaps they were cutting losses and moving on. However, since the end of September, shares of Exco are up more than 10%.

CVR Energy (CVI) was another energy name that found hedge fund managers on either side. Eton Park and GLG Partners sold the stock while Harbinger Capital bought shares. Similarly, while Och-Ziff bought up Exxon Mobil (XOM) shares, Tudor Investment was selling.

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