Sector Picks From Daniel Loeb's Third Point LLC

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 |  Includes: ACW, ANRZQ, CVI, EBAY, KMI, LYB, MRO, NABI, NVS, NXPI, PLL, POT, RFP, SUN, SWY, TSO, WHR, WMB, XRM
by: GuruFundPicks
New York-based Third Point LLC, with $2.3 billion in equity assets under management, was founded in 1995 by CEO Daniel S. Loeb. The firm’s hedge funds include Third Point Partners, Third Point Opportunities Master Fund, Third Point Ultra Master Fund and Third Point Resources.

In addition, they also have a venture capital arm, Third Point Ventures, based in Sunnyvale, CA, that is focused on early stage alternative energy and clear tech companies. Besides New York, they have additional offices in Los Angeles, Hong Kong, Bangalore and London.

Mr. Loeb is well-known in the financial world for writing a scathing letter to financial executives, expressing his disapproval of their performance and pushing for changes; however, such shareholder activism accounts for a minor part of his investments. Third Point hedge fund has returned 9.44% annualized in the last three years versus 1.4% for the S&P 500.

The fund holds a moderately concentrated portfolio of 65 positions, with 40% of its holdings in large-caps, 35% in mid-caps, and the remaining 25% in small-cap equities. Its portfolio turnover is 100% implying an average holding period of one year.

Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight basic materials (10%), energy (35%) and consumer cyclical (5%) sectors, and it is under-weight consumer non-cyclical (4%), healthcare (3%), capital goods (1%) and technology (10%) sectors, compared to the weighting of these sectors in the overall economy.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:

  • Energy sector: Buy Alpha Natural Resources (ANR) and Buy El Paso Corp. (EP). Third Point added $428 million to its $310 million prior quarter position in the sector. It added $255 million in petroleum refining and marketing companies, including $132 million in CVR Energy (NYSE:CVI), new $67 million position in Tesoro Corp. (NYSE:TSO), and $57 million in Sunoco Inc. (NYSE:SUN); it added a new $198 million position in El Paso Corp. (EP), a company engaged in natural gas transmission, exploration and production; and it dropped completely its $137 million from its position in coal producer Alpha Natural Resources. The position in ANR is a conversion from the prior position in Massey Energy that was acquired by ANR last quarter, and the position in Massey Energy was opened at the end of 2010. ANR trades at a forward price-to-earnings ratio of 7, at the bottom of its historic P/E range while earnings are projected to grow almost 100% year-over-year in the December 2011 fiscal year and at almost 45% the following year. With the acquisition of Massey, it now controls the largest domestic metallurgical reserves. The stock has dropped off 40% from its highs in January, and is currently trading in the low-$40s, while analyst targets are in the $70s. Of the 20 analysts covering ANR, fourteen recommend it as a buy, five a hold, and 1 rates it at under-perform. EP trades at a forward 15 P/E, near the top of its historical P/E range. However, all 12 analysts covering the company rate it as a buy or a strong buy, with price targets in the low- to high-$20s, significantly above its current $19 trading price. The catalyst that investors are hoping will unlock value in EP is the upcoming split of EP into two publicly traded companies that was announced on May 24th, creating a separate natural gas exploration and production ((E&P)) company, and a natural gas pipeline company.
  • Services sector: Buy EBay Inc. (NASDAQ:EBAY). Third Point added $90 million to its $130 million prior quarter position in the sector. It added a new $48 million position in online marketplace company EBay Inc. and $45 million in supermarket chain company Safeway Inc. (NYSE:SWY). SWY trades at a 11-12 forward P/E, near the bottom of its historic range due to a weak macro-economic environment that has led to annual earnings falling from $2.18 in 2008, to $1.58 last year. We believe the stock is fairly valued at current levels, and would wait for more signs of a pick-up in the overall economy before committing to this stock. EBAY trades at a forward 12-13 P/E, near the bottom of its historic P/E range. Earnings flattened out during the 2008-2010 period, but are projected to grow strongly in the low double-digits going forward based on strength in both its marketplace and PayPal businesses. Of the 21 analysts covering the stock, thirteen rate it at a buy/strong buy, twelve at a hold, and only one gives it a sell rating. Analyst price targets are in the high-$30s to low-$40s, while the stock has corrected 20% from its recent high and is currently trading near $28.
  • Technology sector: Buy NXP Semiconductors NV (NASDAQ:NXPI). Third Point's position in the sector remained unchanged from $260 million in the prior quarter. However, this was accomplished with some reshuffling, dropping its $58 million position in Lender Processing Services (LPS), a provider of integrated technology and outsourced services to the mortgage lending industry, and added $48 million to its $94 million position in NXP Semiconductors NV, a Netherlands-based provider of mixed-signal, analog, power management, RF and digital processing semiconductors. The position in NXPI was opened in the $11-$12 range in the summer of 2010, so the adding to that position in the last quarter in the $30 range is a high conviction buy decision by Third Point. NXPI trades at a forward 7-8 P/E, it has corrected 35% from its recent highs in April, and earnings are projected to increase from $1.17 in 2010 to $2.42 to 2011 and to $3.22 in fiscal year 2012. We believe NXPI is priced at attractive buy levels based on the projected high growth and low valuation, and the projected applications of the company’s near field communications (NFC) technology going forward in mobile e-commerce and communications, including its recent partnership with Google (NASDAQ:GOOG) in enabling Google Wallet.
  • Consumer cyclical sector: Third Point added $83 million to its $25 million prior quarter position in the sector, including a new $49 million position in Whirlpool Corp. (NYSE:WHR) and a new $45 million position in Accuride Corp. (NYSE:ACW), a manufacturer of commercial vehicle wheels and components, chassis, truck body and seating assemblies for heavy duty truck OEMs. Furthermore, subsequent to the end of the March quarter, Third Point filed a 13-G indicating that they added $27 million in Xerium Technologies Inc. (NYSE:XRM), a manufacturer of paper clothing and roll cover products used on paper-making machines and spreader rolls. The position in XRM was opened in the $20 range in the spring of 2010, so the addition of more stock in the low-$20s at the end of April is significant and indicative of Third Point’s conviction in its buy decision.

Table

Company
Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
New 13G 5% Ownership Filing Since End of March 2011 Quarter
Nabi Pharmaceuticals
NABI
Cut
$20 million
($1) million
0.87%
8.16%
Xerium Technologies Inc.
XRM
Add
$41 million
$5 million
1.74%
11.33%
Top Buys and Sells
El Paso Corp.
EP
New
$ 198 million
$198 million
8.44%
1.43%
Potash Corp Saskatchewan
POT
Cut
$ 29 million
($183) million
1.26%
0.06%
Alpha Natural Resources
ANR
Drop
$ 0 million
($137) million
0.00%
0.00%
CVR Energy Inc.
CVI
Add
$ 169 million
$132 million
7.21%
8.32%
Novartis AG
NVS
Drop
$ 0 million
($128) million
0.00%
0.00%
Tesoro Corp.
TSO
New
$ 67 million
$67 million
2.86%
1.74%
Lender Processing Services
LPS
Drop
$ 0 million
($58) million
0.00%
0.00%
Sunoco Inc.
SUN
Add
$ 98 million
$57 million
4.18%
1.78%
Abitibibowater Inc.
ABH
Drop
$ 0 million
($50) million
0.00%
0.00%
Pall Corp.
PLL
Add
$ 69 million
$49 million
2.95%
1.03%
Whirlpool Corp.
WHR
New
$ 49 million
$49 million
2.07%
0.75%
Marathon Oil Corp.
MRO
Add
$ 53 million
$48 million
2.27%
0.14%
NXP Semiconductors N V
NXPI
Add
$ 142 million
$48 million
6.07%
1.89%
EBay Inc.
EBAY
New
$ 47 million
$47 million
1.98%
0.12%
Safeway Inc.
SWY
New
$ 45 million
$45 million
1.91%
0.54%
Top Holdings
Lyondellbasell Industries N V
LYB
Cut
$ 146 million
($30) million
6.24%
0.65%
Williams Cos Inc Del
WMB
Add
$ 143 million
$19 million
6.11%
0.78%
Click to enlarge

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.